We have all seen bad times when we are in a bad financial place. Sometimes, it comes out of no whereas some emergency that was not expected. It could be medical bills or some major household expense that just was not planned. No matter how it happens, we all have found ourselves in that position. It is not fun and it takes work to get out of it. Fortunately, we can always turn it around and there are some tools to help us. There are many different types of personal loans available, but that may not be exactly what you need when you are already drowning in debt. Debt consolidation loans may be a better option for you.
There are different ways to go about debt consolidation regardless of the type of credit you have. Continue reading to find out more about how to consolidate your debt no matter what your credit score is.
What Is Debt Consolidation?
I like to start with basic information so that I know everyone has a basic understanding. I am going to give you some fundamental information about debt consolidation loans so that you can make informed decisions. Debt consolidation is a way for you to regain control of your debt and your money. When you consolidate your debt you are taking multiple different bills and merging them all into one larger monthly payment. You can do this on your own, or you can work with a debt management company.
A debt management company may also be referred to as a personal loan finance company. This is a great way to pay off any credit cards that have high-interest rates. Often, you are able to get a debt consolidation loan that has a lower interest rate than those credit cards.
There is a process that you should follow if you are interested in consolidating your debt. Understanding the process of debt consolidation is equally as important as understanding the basic terms. I am going to outline those steps for you later in this posting. Stick with me as we travel through all the things you need to know about consolidating your debt no matter your credit.
Advantages to Debt Consolidation
There is a lot of information about debt consolidation loans available for you to read. Unfortunately, some of it is speculation and opinion. I am going to give you the real truth about the benefits to consolidating your debt.
The biggest advantage to consolidating your debt is taking multiple monthly payments and combining them into one large payment. This is helpful from a mental perspective because it is easier to wrap your thoughts around one payment. You only have to worry about paying one bill instead of multiple bills. Since you are focused on one payment, it is easy for you to determine if you can pay more each month. This can help you pay off your debt sooner. It is common to feel overwhelmed by bills and debt when you have to make multiple payments.
Also, consolidating your debt can help you improve your credit score. One of the most common reasons a credit score drops is due to late or missed payments. If you are only making one payment, it is easier to make sure you pay that bill on time and make the full payment. As you decrease your debt, you are improving your debt to income ratio. Even with these advantages, you should seriously consider all factors when determining if you should consolidate your debt. Do not take this step without careful thought and consideration.
Disadvantages to Debt Consolidation
As with anything, there is good and bad to debt consolidation loans. Much of it depends on how you use it. I am going to list all of the possible disadvantages to debt consolidation so that you can have all of the information.
Often times, debt consolidation loans come with a high-interest rate. This is especially true if you have less than perfect credit. This interest rate may be higher than what you are paying on your existing loans. However, this may be an instance where you need to look at the bottom line. Even though the interest rate is higher, is it better for you in the long run?
When you consolidate debt, you are often consolidating credit card debt. This makes sense because credit cards get out of control quickly and it is hard to reign them back in. A debt consolidation loan is incredibly helpful with that. However, if you do not close your credit card accounts, they remain open and available for use. If you do not put parameters on yourself when it comes to your credit card use, they could get out of control again. You should close all but one of your credit cards so that you are not tempted to use them. This is where your self-control comes into play. This is where you need to actively change your habits so that you do not get yourself back into a bad situation.
Another downside to debt consolidation is that it is easy to think you have decreased your debt since you only have one payment. That is not the case. You still have the same amount of debt, it just now is merged together into one large amount instead of several smaller pieces.
Debt Consolidation for All Types of Credit: Does it exist?
So let us talk real talk about bad credit and debt consolidation. It makes sense that the person needing debt consolidation loans tends to have bad credit, right? Typically it means that your debt is out of control and you are struggling to pay it. This does not mean you have bad credit. You may still be able to pay your minimum payments on time. Your credit is probably not great because you have a lot of revolving credit and a high debt to income ratio. It is safe to say that those looking for debt consolidation come from all credit score areas. However, most of those needing debt consolidation have bad credit.
If you have bad credit, you may want to consider some other options. Again, before doing this, you must thoughtfully consider if these are the best options for you. You may decide that you do not need a debt consolidation loan. You may only need some money to get you through a tight spot. In that case, bad credit emergency loans may be what you really need. These are fast loans so you can get cash right now when you need it. These types of loans are completely different from a debt consolidation loan and have a short turn around time. That means you have to pay them back in a short period of time. They usually have high interest rates and huge penalties if you do not pay them back on time.
Will Debt Consolidation Hurt My Credit?
Initially, it may seem as though debt consolidation loans negatively impact your credit score. Keep in mind, these are loans and initially, it seems like you are taking on more debt. When you get a debt consolidation loan, you can approach it a couple of different ways. You can handle it yourself, or you can use a debt consolidation manager. No matter which way you go, you apply for the debt consolidation loan while you still have all the other debt. So, all of your debt is being considered at this point. If you are approved, you take on more debt up front. This negatively impacts your credit score because it changes your debt to income ratio. Once you have the money, you can begin to pay off those smaller debts. It is important to do this quickly.
The last thing you want is money sitting in your account that you begin to use for other things. You should immediately pay off all of your other debts. When you do this, those debts are considered satisfied. This may take a little bit of time, a couple of payment cycles, before it is reflected on your credit report. For a few months, it may not show that you have paid off all of that other debt. During this time, your credit score may go down. The good news is once those other debts are paid, it should begin to come back up. As you are paying your debt consolidation loan, that also positively impacts your credit score. You must understand the process and be willing to have the possibility that your credit score is impacted.
Should I Consolidate My Debt?
When deciding if debt consolidation loans are the best option for you, only you can make that decision. Consolidating debt to a lower interest seems like a smart idea. You can get advice from many people about the best path, but at the end of it, you have to decide for yourself. The first thing you should do is educate yourself about all of the options you have. When you look at all the loan options available to you, is debt consolidation the best one? You need to understand your credit score and how it impacts your everyday life. You need to understand your finances and know what you can afford. The key here is knowledge. The more knowledge you have about your situation and all of your options, the better able you are to make the best decision for you.
The bottom line for you is can you continue to afford to do what you are doing? Is what you are doing today going to continue to pay your bills so that you can get ahead of them and regain control? If the answer to those questions is no, then you should consider looking at other options. If what you are doing today is not working, you need to make changes. That change may very well be a debt consolidation loan. That change may be to create a budget, yes it is coming, and make changes to your spending habits. You may have the money you need and you are spending it on the wrong things. You are the only one that can make that decision for yourself.
Knowing Your Goals Is The First Step
When you are considering debt consolidation loans, you have to start with the end in mind. You need to be able to define your goal and go through the process of debt consolidation smoothly. Your initial response may be that your goal is to get out of debt. That is a great goal, but is that the only one? While getting yourself out of debt is great, does that change what you are doing today? If you do not make real changes to your habits and behaviors, you are going to find yourself right back here again.
In addition to getting out of debt, you should have a goal of changing your lifestyle to remain debt-free. Now, it is almost impossible to stay completely out of debt. Many of us cannot afford to buy a house in cash, so we need a mortgage. I would argue that is good debt and it is beneficial to you. This is why it is important to truly understand your goals and to break them down into manageable pieces.
You need to write down your short and long term goals. Once you see them on paper, it becomes easier to make them real. A long term goal may be to save towards retirement. Another long term goal is to have a set amount of money saved in five years. A short term goal may be to actually begin saving money. Possibly a short term goal is to save money for a vacation. You may have other short term goals that you have not been able to think about because you are swamped in debt.
Consolidating your debt may give you some freedom to begin to actually think about other goals. You want to make sure that consolidating your debt does not stand in the way of your other goals. If you decide to work with a debt consolidation manager, you may have your credit cards and other assets frozen. Be sure to understand the details of any program that you enter. If freezing your credit cards is part of their process, make sure you know how long they remain frozen. Also make sure that is something you truly want to happen.
Next, It Is Time To Gather Your Debt
You have made the decision that you want debt consolidation loans to help you achieve your goals. Now, you need to understand just how much debt you have. You also want to make sure that you consider all of your debts when thinking about how much money you need to consolidate your debt. Until you take this step, you may not fully appreciate just how much debt you have. There always seems to be one that gets forgotten or falls between the cracks. Do not guess or estimate. It is important that you work with accurate figures.
To get that, contact your credit card companies and any loans you owe to get the pay off amount. That amount may not be what you think, so you should always check. That payoff amount is changeable, so even when you get the number from the lender, it could be off just a bit when you pay the debt. Typically, it is off in your favor, but not always.
You may make another payment between the time you get the estimate and you pay off the debt. This makes the pay off amount decrease. If it is a credit card, there could be interest payments that have not hit your account when you received your payoff amount. This can change the amount to be higher than what you thought. You can use a debt consolidation calculator to help you get close to the amount you need.
An important tip here is continue to pay your bills while waiting for the debt consolidation approval. Do not stop paying your bills thinking it all works out in the end. It might, but it might not. You do not want to play around with your debts by not paying them. If you overpay them, they issue a refund. It is better to overpay. If you do not pay the bill, you receive interest charges and fees. It also negatively impacts your credit. You are working hard to improve your credit. Do not make that misstep and hurt it.
What Are My Options?
Depending on your credit, you have options other than debt consolidation loans. You can negotiate a debt settlement with the lenders. Often times, if you are honest with those to whom you owe money, they work with you. Every lender wants their money. When they have to take steps to force you to give them their money, it costs them more money. They do it, but it comes with a price. If they can avoid all that by working with you, they will. It is important to talk to your lenders. By negotiating a lower debt, you and the creditor agree to new terms. This may be a positive end to a tough situation.
However, keep in mind that during this negotiation period, you may not be paying your debts and they continue to grow. This could negatively impact your credit score in the short term. It may not, but you should be aware that it could. Often times, when a debtor is in negotiations with you, they do not report to the credit agencies. This is not a guarantee. You just never know what a debtor might do.
You may be able to borrow money from family or friends to consolidate your debt. If you have a large amount of debt, this may not be possible. However, you may know someone that is able and willing to lend you that kind of money. Often this money comes with lower interest, or no interest at all. You could take out a home equity loan on your house to pay off your debts. This allows you to use the collateral in your house to borrow money. Often times, the interest rates on a home equity loan are not as high as a debt consolidation loan.
Do I Need A Debt Manager?
It is possible to obtain debt consolidation loans without using a debt manager or debt settlement company. However, you have to do the work yourself and that may be something you just do not want to take on. Using a company handles all of those steps for you. I can understand the appeal of that, but be sure you understand what that means for you.
When you opt to use some type of company to handle your debt consolidation, they often require you to have credit counseling. That may be something that you feel you need and you are wondering where to sign up. There are also fees involved with a debt manager. They are doing work for you and they want to get paid, too. If the thought of dealing with lenders and creditors causes you stress and anxiety, those fees may be a small price to pay for peace of mind.
Anything Else I Need To Know?
In all this talk about debt consolidation loans, I have not addressed bankruptcy. Yes, that is an extreme, but depending on your current situation, it may be something you feel you need to consider. I just want to give you a little information about bankruptcy. It used to be really easy to do but that is not the case anymore.
Also, bankruptcy does not forgive all of your debts. You may go through the process and take a huge hit to your credit only to find out that you still have debts you need to pay. It becomes a huge black mark on your credit report that hangs out there for 7 to 10 years. It is possible to start to begin to build credit again in about a year, but that smudge lingers for a long time.
Even when you file for bankruptcy, you still have to go through the debt settlement process. That part is a huge headache for you. These days, there is a huge stigma with bankruptcy, so it is something that should not be considered lightly. It may not be the right option for you at this time, or ever.
Why Should I Have A Budget?
I cannot ever stress enough how important it is to create a budget for yourself. It is even more important when you are working hard to pull yourself out of debt. Debt consolidation loans only do part of the job for you. They can help you merge all of your small debts into one larger, more manageable debt, but they cannot change your habits. You must do that for yourself. The first step in that is listing out all of your expenses and seeing how they compare with your income. You may be surprised to see where all your money is going. I am willing to bet that you are not even aware how much money you are spending and where.
Debt consolidation loans are a great way to get control of the money you already spent. A budget is a great way to get control of the money you are earning and how you plan to spend it in the future. When creating a budget, you can look at the things you pay for that you are not using, such as a gym membership. If you have it and do not use it, cancel it. This is the time when you can stop paying for things you do not need or use.
Here we are at the end of the article about debt consolidation loans and I hope you have learned valuable information. No matter which path you choose, it is important that you do so in a smart and meaningful way. Make sure you have all the information you need before making a decision about debt consolidation loans. You must do what is the right thing for you, but you cannot decide that if you are not informed about all of your options. On the surface something may look like a good choice for you, but when you dig a little deeper, you may find out that it really is not.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.