Overloaded with outstanding loans for education, car and credit cards? You might have received several calls from agencies that have talked about overcoming these debts after payment of monthly instalments failed over a period of time.
So debt consolidation is the next obvious move that you want to make. But before that, you should be familiar and updated with the nuances of debt consolidation. Let us take a step-by-step approach.
What is debt consolidation?
By the very meaning of it, debt consolidation is the combination of several unsecured debts like loans, credit cards, medical bills and alike into one composite unit with the promise of lower interest rate. The promise also has elements such as lower monthly payments and a simplified debt relief plan.
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Here’s the catch that one has to sense before getting into debt consolidation. These companies promise one thing and delivers something else.
Let’s say, your total equated monthly instalment (EMIs) towards personal loan and credit card are USD 1000 and USD 500 respectively. That makes a total payment of USD1500 every month for the next three years for a combined sum of say USD 50,000.
The debt restructuring company will rope in an idea whereby your monthly payment will come down to USD 600 for a period of 5 years.
Who would not grab such a yummy offer? The flip side of this offer is that instead of USD 50,000 you will end up paying USD 1, 10,000.
An increase of USD 60,000. Not a good idea, is it?
No guarantee of lower interest rates:
The interest rate is always a matter of discretion of the lender and not the borrower. Your payment history and your credit score will determine the interest rate that is offered to you.
The lower interest rate is a promotional offer by the agency that has approached you and it will be applicable for a short period of time only.
Consolidation of debt is not elimination:
With an extended term of repayment, you have to pay for a much longer time and be in a perennial debt trap. You have to realise, it is restructuring and not reforming.
Here is the solution:
In order to grow your wealth and credit score, changing the spending habits is mandatory. Obtaining a consolidation loan and recharging credit cards will never get you out of the whirlpool.
Stop using the cards and close all accounts. Gradually your credit score will improve as also your wealth.
Expert advice from a credit counsellor will help you negotiate with your own creditors. Following up a get-out-of-debt plan will help your credit score improve faster than to declare bankruptcy.
Making the payments on time and offing the debt load are the keys to avoid debt consolidation.
Even though your choices landed you in the pile of debt, it is only you who have to climb your way out of it. All you need is the right plan.
While debt consolidation may be the answer to help you get out from under the pressure of existing debt the real solution will be to avoid repeating the mistakes that got you there in the first place.