Debt Consolidation
  • September 5, 2022
  • Adrina Martinez

Consolidation flashes across your mind when you are juggling multiple debts, giving you a chance to pay off all debts once and for all and then left with one large debt to pay down in fixed monthly instalments. How wonderful an option does it seem?

However, for many of you, it brings a series of doubtful questions, like why you need to do it, how you will benefit from it, what initial arrangements you are to make, and how to choose a company that works with a consolidation approach.

Well, it is a feasible option for everyone, even if you do not have multiple debts, but the interest is through the roof. Paying high figures every month to several lenders may not be looked at as a better option than combining all of them into one loan and paying it down over a period of months, taking advantage of lower interest rates. Not to mention your credit score needs to be good to do so.

If you have finally decided to bring your finances in shape, consolidation may work for you, but it does require some homework.

Tips to get started

Here are the tips to get started if you are looking to consolidate your debts.

a - Peruse your credit report

First off, you need to look at your credit report, which reflects your financial behaviour and serves as the basis for deciding your ability to qualify for a consolidation loan by a lender. There are chances to get it despite a bad credit rating – though not many – finding the best debt consolidation loans for bad credit will certainly be a herculean task.

Get a copy from all credit reference agencies as you never know which one a lender will refer to, and chances are the report from one agency seems good while the same seems to be faulty from another agency. Before you put in, you should be aware of all roadblocks that come in the way of qualifying the best deal and getting them fixed if anyone comes to your notice.

b - Look for your options carefully

Various lenders are out there providing debt consolidation loans, but you do not rush to them without doing research. Thorough research will help you choose the best lender, but it is not just limited to finding a good lender that suits your situation.

You will have to consider your options as well. Consolidation is entirely a new thing; in fact, it is not a type of exclusive loan that you take out to fund something. It is rather a merging of your current outstanding obligations. Everyone’s situation is unique.

It is likely your friend benefitted from it, but it may throw you in at the deep end. Consider factors like your lifestyle, finances, and family needs. Some people consolidate credit card debt, while others consolidate multiple types of debt.

If you want to consolidate credit card debt, you may qualify for a 0% APR credit card, depending on your financial situation. However, if you had already done earlier that contributed almost no progress, it does not make sense to consolidate them.

You will further hurt your credit score and fall into debt. Knowing the credit requirements if you are taking out a personal to consolidate different types of debts you owe. Also, ask them if a debt consolidation agency will work throughout the entire process. What will your obligations be, and what consequences will you go through if you fall behind the payment?

c - Do the math

This is what everybody shirks, but you cannot get the best deal if you do not do basic calculations to know how much it would cost you. It is generally assumed that consolidation will work better if you are juggling multiple debts, especially with high-interest debts. Still, the fact is that consolidation sometimes may not work in your favour.

It may cost you the same or more than that. You need to look at much more vital information, like interest rates, length of the loan, loan type, setup fees, and additional fees, if any. Do not forget to explore other options like banks, credit unions and other lenders. You should carefully see every aspect before signing the dotted line. Careful deliberation is a must, so you do not rue the day.  

d - Take stock of your personal finances

You should take stock of your personal finances before consolidating your debts. If you sign the agreement, you will be supposed to pay it down in fixed monthly instalments over a period of time. After meeting all of your living expenses, you will have to examine if your budget has room to cover that cost.

Since you cannot get to know the actual amount of the instalment until you sign the agreement, you should use an online calculator. At least, you will have an idea of how much you will need every month, and of course, the actual would be higher than the estimated one as it does not include the setup fees and processing fees.

See if you will be able to meet it. If not, you will have to whittle down your monthly expenses. Take a look at your discretionary expenses.

1 - Do you spend a lot of money on movies?

2 - Do you keep buying clothes just for pleasure?

3 - Do you often go to restaurants?

You will have to cut back on these discretionary expenses to allow your budget to have enough room to pay down instalments of consolidation debt. It is advisable that you consult a financial counsellor who can guide you about it. Do not make any decisions in a rush or panic. Taking their advice will certainly be fruitful.

Take message home

Consolidation could be a better option, but it does not mean that there is nothing to research about. They can be an expensive alternative to your financial circumstances, and therefore it is suggested to do the whole preparation before getting them.

Look for your options carefully and take stock of your personal finances to see if consolidation is actually worth saving money.

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