Are You Ready To Consolidate Your Debts?
Debt consolidation has gained tremendous popularity in the recent years. Recently, banks have been very rigorous on their risk models and it became almost impossible to obtain a personal loan. This led to a lot of online lenders which have changed the way as to how consumers borrow money. While things look easier now, it is still important to have a reasonable understanding of how debt consolidation works. Here are some things that you should look into before considering this option:
Acknowledge the Ultimate Source of the Problem
Consolidating your debts is a great way to pay off those high-interest credit cards which will creep on you later on while you save thousands of dollars avoiding them. In consolidating your debts, the main benefits include having fixed interest rates as well as single monthly payments. If, however, you pay off your credit cards through a personal loan, you will have zero balances on all of your accounts. This only means that you will actually have access to your credit card limits.
Paying off some debts, however, does not mean that this is the end of all your problems. You also have to develop some discipline to make sure that you do not accumulate more debt right after. Try to reflect on how you got into that debt, to begin with. Whether it was poor money management skills or going out too much, it is important to be aware of the source of the problem before applying for a loan.
Check Your Credit Reports
One of the first things that you would want to check before you consider debt consolidation would be your credit reports. When there is an error on any of your credit reports, you might be prevented from qualifying for the loan. If you find an error, be sure to dispute it. You can get a free annual credit report from any major credit reporting agencies. Once you are aware of where your credit stands, you will get most of the information that you will need to decide on what debt consolidation plan should work best for your situation.
Be Sure to Consolidate the Right Debts
When applying for debt consolidations, your instincts might get the best out of your and might tell you to include the highest amount that you have been approved for. Debt consolidation does not actually work this way, and this can even hurt you in the long run. The first thing to look at when consolidating debts should be what your interest rates are with each account.
It might look like you are doing yourself a big favor when you consolidate all your accounts, but you will actually end up paying more interest when you do this. It might sound romantic to have just one monthly payment, but you should make sure that you are only consolidating those with high-interest rates.
Check Your Options
You should be very careful about who you work with, especially considering that you will be working on something very delicate which is your finances. You should consider looking for a nonprofit credit counseling organization that belongs to reliable entities such as the Financial Counselling Association of America or the National Foundation for Credit Counselling. These entities ensure that their member agencies pass tight standards and that their counselors are all certified.
You should also be aware that all plans are virtually the same. Financial institutions do not give preference to anybody in the organization. While agencies and employees have different approaches, their plans are actually just the same.
Consolidation is Not for Everyone
Before you even consider a debt management plan, you should see to it that the bulk of your balances should be unsecured such as in credit, personal loans or collection accounts. If most of your liabilities will include other types such as tax debt, old parking tickets or unpaid child support, these plans might not be the best for you.
Another thing to keep in check is that you have to make sure that you can pay not just for months, but for years. You also have to see to it that your cost of living and necessaries are covered, as well as some savings. If you have some cash left over, it might be better for you to manage your debts on your own.
Debt consolidation might be a practical way to manage those high-interest rates, but it is not a sure fire easy way to get rid of debt. When in doubt, do not hesitate to consult your accountant or financial consultant for what would work best for you.
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