If you are in a trap with multitude of debts making it difficult for you to move on further, you are not alone. Many people now find relief in consolidating their debts, which could probably be your way out too from the debt chaos. Debt consolidation is an approach to lower your monthly pay-outs. It helps you get rid of the debts faster, and brings you back into the driver’s seat to better control your finances. There are various consolidation methods. Here’s what you need to know.
An overview of debt consolidation
Debt consolidation is primarily the process of combining all your debts into a single loan, which may have a lower interest rate. So, instead of paying off multiple debts every month, you need to just make a single, but higher payment. This not only simplifies your bill paying efforts, but also reduces the total amount you have to pay off in case of multiple creditors.
The major advantage of debt consolidation is that it can let you go debt-free quickly. However, along with doing consolidation, you also have to take a disciplined approach when managing personal finance to achieve this goal.
This is the most used method in debt consolidation in which your existing balances of all the debts will be transferred into a new loan. The major pros and cons of balance transfer as a popular debt consolidation method are as below.
- The interest of balance-transferred loans may be very low. The average balance transfer introductory rate for these loans is usually 2.5 percent.
- The major advantage of any debt consolidation package is that there is only one account for you to keep a track of.
- Quick application and approval process without much paperwork or delays.
- The fee charge up-front is also low in case of balance transfers.
- Those who have a lot credit score may not be qualified for this option.
- A balance transfer fee is typical for all the loans, which may sometimes be huge.
- The interest rates may go up in case of a late payment. Sometimes, the late payment rates may go much higher.
- Introductory rate may be very reassuring a limited time, but then it may increase. You need to check it beforehand.
Paying off the debts
A couple of methods to try are pointed out below.
- Method of debt stacking
In this, you can begin with working on your highest interest rate credit card debts while still paying off the payment of other minimum payments credit cards. With this, over a long run, you can save money, but it will still take a long time for you to pay off the debts, if it is a big balance.
- Snowball method
Famous economist Dave Ramsey developed this method to relieve overwhelming debts. In this, you may list out your credit card debts starting from the lowest balance to the highest, and then put in efforts to clearing one by one starting from the lowest balance. The idea behind this method is that as you get rid of each debt, you naturally gain more momentum to pay off the next like a snowball gathering momentum on rolling downhill.
However, as a novice in finance, it is not always ideal for you to take a decision on your own when it comes to planning for debt consolidation. There are many non-profile credit agencies and expert credit counselors who can help you for free to effectively plan your debt consolidation and draw out the best methods for you to get rid of debts.
Author bio: Randy Strongman is public financial advisor in a leading investment bank in the United States and a debt consolidation consultant. He also conducts classes and education programs at schools at corporate firms in order to develop savings habit among the youngsters and also to help them live a debt-free life.