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Debt Consolidation (Consolidate Your Debt)

By Edited Sep 26, 2015 0 0

In simple terms, a debt consolidation reorganizes all your existing debts and credit card bills into a single new loan with a reduced monthly installment amount but increased term tenure. Prior to this, you may have several loans with varying interest fees and terms, but after you consolidate your debts, you have only one loan to concern yourself with repayments every month.

The goal of debt consolidation is to protect your credit report and systematically reduce your debts. It is important to protect or repair your personal credit because you get lower interest charges with a good credit, even when you have heavy debts on your shoulders. As long as you pay your dues every month punctually, you can still maintain a good credit score and low interest fees on your loans.

If you do not consolidate your debts, you tend to spend a lot of time juggling with the payments on your various credit card bills and unsecured bad credit loan deadlines. Even if you have the money to pay punctually, if you just forget a single bill, it will show up in your personal credit history for at least 6 months as a defaulted payment and imagine how much damage it can cause if you forget a few more times. By the time you realize your loan interests are increased accordingly in response to your worsening credit, it is too late.

When applying for a debt consolidation loan, it helps if you can offer collateral such as your house or car to lower the interest fees on your new loan. Otherwise, the only option is to punctually pay your monthly debt installments for at least 6 months continuously and then check your personal credit score for improvements. If you reach a guaranteed 700 fico score, you will be eligible for much better loan terms and that will greatly help in eliminating the remaining of your consolidated loans.

When you are consolidating your debt, make sure you stop adding more debts and credit card arrears to make the whole situation worse. If you cannot resist the urges to spend on credit, cut these cards up such that you cannot use them anymore. Learn to use only cash to buy whatever you need. It is old fashioned but prudent at the same time.

Discuss with your loan broker to derive the optimal loan repayment schedule. The monthly loan installment must not be too high such that you cannot afford to do so comfortably every month until your consolidated debt is fully cleared. Where possible, it should be between 20% to 30% of your monthly earnings. The more you repay every month, the faster you eliminate your debts and become debt free. You also end up paying less money on interest fees as well since tem tenure can be the greatest enemy for your personal savings.

However, sometimes you need to go higher and repay at 40% to 50% of your monthly earnings when you consolidate your debts. This depends on the individual. For example, if you are earning $10,000 a month, you are no problem with your daily expenses even when you put aside $5,000 every month to clear your debt consolidation loan. More importantly, some people have such heavy debts that they need to use more than 50% of their earnings just to exceed the minimum monthly debt repayment.

The minimum monthly debt repayment amount is the sum of money just enough to repay the accrued interest for the month and this does not include any money towards reducing the loan principal. If you only pay this minimum amount every month, you will never be able to clear your consolidated loans at all.

When you consolidate your debts, make sure you find out how long it will take you to repay all your debts given your current earnings. You also need to account for the fact that what happens if you lose your income such as due to retrenchment, illness or accidents. Do you have the relevant insurance cover to protect your dependents against such occurrences. Make sure that you have spare cash to go into your personal savings to cope with unexpected expenses. If these opposing requirements are not possible to meet with a debt consolidation loan, then maybe you are not suitable to consolidate your debts. Filing for Chapter 7 Straight Bankruptcy may be a better option for your case.

Nowadays, it is common to have several credit cards and even line of credit for convenient financing. It is easy to spend above what you can actually afford and that has indeed happened to a lot of people. Getting caught in the high interest debt trap is not easy to escape without the help of debt consolidation. To systematically eliminate your debts and become financially independent, you may need to consolidate your debts in order to get an effective debt repayment schedule.

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