11/15/2022
Debt consolidation is a one-time situation that you don't want to face but is more common than you think. We say this because being drowning in fees, bills or lack of liquidity isn't exactly a dream life.
Once you find yourself in this situation you can turn to this well-known method to better manage your indebtedness.
What is debt consolidation?
In a nutshell, debt consolidation refers to the action of gathering all the debts you have and turning them into one.
If, for example, you have a mortgage loan, several credit cards, a car loan or other commitments and you want to simplify the management of each installment, you appeal to consolidate debts or ask for external help.
There are several ways to deal with this process, the most common being to ask for some kind of large loan and ideally with a lower interest rate than the average of your other accounts.
Of course, applying for such financing will depend on your credit score and the options available. Having bad credit means you'll get a higher rate.
Also known as credit consolidation or bill consolidation, this strategy is designed to get you out of debt faster. When you go to a program or debt counselor, they work with your creditors to lower your interest rate.
Although this process is recommended for credit cards, it is a good option for:
- Unsecured loans.
- Medical debts.
- Unpaid utilities.
- Payday loans.
- Accounts assigned for collection.
How to proceed with debt consolidation?
Before moving on to the available resources, you must understand that debt consolidation is a measure to fix the consequences of your bad financial habits.
It is a process that will require you to control expenses, make a budget, calculate what is the best option and, if you enter a program, pay on time.
By having a plan to simplify your debts, having a single monthly payment and setting a goal each month, you ease the financial burden. An effective way to approach this is by taking the following steps:
- Make a list of the debts you want to consolidate.
- Next to each debt, put the interest rate, the amount owed and the payment date.
- Proceed to add up everything you owe to know the total, which gives you a base figure to apply for a personal or other loan. This goes in one column.
- In another column, add up the monthly payments you are making now. This result is used to make a comparison with a consolidation loan.
- You should contact a financial institution (online lender, bank or credit union) to apply for a consolidation loan to cover what you owe. Ask about the rate and what the fees will be.
- Finally, you need to compare what you are paying now with what you will pay once you are granted financing.
Debt Consolidation Options
When it comes to implementing a consolidation strategy, you need to be organized and decide if you will do it on your own or if you will ask for outside help (program). The most common alternatives for dealing with this situation are:
- Getting a personal loan. It is a flexible option that you can find in any traditional or online institution, you can adapt the term and get a reasonable interest rate with a good score. You will have to evaluate the charges, fees and maneuver if your credit score is regular or bad.
- Withdraw money from retirement funds. Recommended as a last resort, almost all retirement plans (401k) give you financing. Among their conditions: you have a 5-year term to pay or else it will be an advance, which is subject to taxes. In addition, if you leave your job, the time is reduced to 60 days and other penalties may apply.
- Transfer balances with credit cards. A popular method is to get one or more 0% introductory rate cards that last 12-18 months. This works with credit card balances and sometimes carries a 1-3 percent fee for each transfer. You need a good or excellent score.
- Borrowing from a life insurance policy. Between this option and bankruptcy, the former is better for you. Insurers make it easy for you to borrow the cash value of this insurance, which you can use for consolidation. Even if you are not required to do so, do not stop paying the premiums. If you don't pay the money back, it will be deducted from your death benefit.
Opting for debt consolidation is a clear symptom of unhealthy finances. You can rely on Busconomico's search engine/comparison for the best advice, find personal loans and evaluate other products that can help you.
Español: Qué es la consolidación de deudas y cómo realizarla