Get Out of Debt

Consolidate Your Debts By Yourself

If you have found yourself deeply in debt and looking for a way out, then debt consolidation is an option. Debt consolidation is simply done by taking out a loan, usually a personal loan from the bank or a home equity loan, and then using that money to pay off all of your debts. Then, instead of making your usual monthly payments to several different companies, you will just make one payment on your new loan. The advantage of debt consolidation is that you'll be able to save hundreds or thousands of dollars because you can quickly pay off debts that have high interest rates, by using your new loan, and replace those interest-laden monthly payments with just one payment that has a much lower interest rate.

Why Handle Debt Consolidation By Yourself

The reason most people choose to take care of the details of their own debt consolidation is because it's basically free and they don't have to worry about being scammed by companies who promise to take care of everything, only to find that the payments are being kept by the debt consolidation agency.

Consolidating debt isn't overly difficult, it mostly requires time in securing the loan, making payments on the debts and verifying that the creditor receives and records the payment, showing that the balance has been paid in full. After that initial time investment, you only need to worry about sending one monthly payment to your bank or mortgage lender. Of course, working overtime or picking up a part-time job to pay down the debt faster will be beneficial to your progress.

How Will Debt Consolidation Affect Your Credit Score

If you are at the point where you really need to consolidate your debt, chances are that your credit score isn't very good and has been that way for some time. It's really hard to give a generalized number, as each situation is unique, and the way credit scores are determined is not completely known. However most people notice, if they are paying attention to their score, an initial drop in their score from taking out yet another loan, but as they pay off their debts and their credit utilization ratio goes down, they see a steady increase in their score.  Overall, doing a debt consolidation is a positive thing, provided you stay out of debt in the future.

Steps to Consolidate Debt

1. How Much Do You Owe? You need to get a pretty accurate total of the amount you owe in order to make it worth your time and effort. Get a copy of your credit report to see what and how much you owe if you aren't sure. Make two lists of numbers on a sheet of paper. In one column, write down your monthly payment and in the other write down the total debt. Once you have completed your list, add up the total debt amount and that will be the amount that you want to borrow.

2. Get A Loan: If you have a home with some equity, then a home equity loan or doing a refinance and throwing the debt into it would make the most sense. You already have an established record and payment history with the lender. If you don't own a home or don't want to risk losing your house if you fall behind on payments, then getting a loan from a local bank or credit union is the best option. Call up your preferred lender first to find out what terms they can offer and then spend time shopping around to see if others can give you a better offer. Once you choose a lender, take care of all the paperwork and then deposit the money into your checking account.

3. Pay Off Current Debts: Now that you have cash in the bank, it's time to sit down and pay off your debts. You can either pay them by check and mail them or pay online. If you mail the money, take your envelopes into the post office so that they don't get taken from your mailbox. Taking care of this online is a simpler and safer option and you'll get email notifications once your money has been received and credited to your account. Make sure that you keep all of the "paid in full" letters that you get from the creditors just in case they make some error and it shows up as a debt again.

4. Pay Off Your New Loan: Once you have your debts all paid off, you just have this one to focus on. Make sure that you pay your payment early each month to make sure that you are continually increasing your credit score. Also consider taking extra jobs to pay it off early, thus decreasing the amount of interest that you'll pay over the life of the loan.

Drawbacks of Debt Consolidation

Lack of Accountability: As with any goal that you want to accomplish, lack of accountability often leads to failure and doing debt consoidation on your own is no exception. To overcome this potential hazard, make sure that your partner, if any, is involved in this process and find a friend who will help keep you on track. Once you do the initial work of getting your debts consolidated to one loan, the difficult part is over. But there's still the temptation to overspend on your credit cards again.

Low Interest Debts: If your debts are mostly low or no interest, it might not be worthwhile to consolidate them. However if you have a mix of credit card debt, student loans and a car loan averaging 10% interest it's totally worth it to snag a loan at 5%, even if one of those student loans is at 4.25%. On the other hand, you could just leave that debt out of your consolidation and keep paying it separately.

You'll Pay the Balance in Full: Debt consolidation isn't debt settlement, where you negotiate with creditors for a smaller payment. Debt settlement is best suited for accounts that are at least six months behind and creditors will begin negotiations if they feel that they risk not getting paid at all. If you are current on all of your payments then you need to pay off the full amount. The benefit is that in paying it off at once, you'll save a lot on interest payments and potential late fees. What if you have an old debt that you haven't paid on for a long time? In this case, if you want to negotiate for a lower amount, you should pay off all of the debts that you are current on and then call up the creditor and make them an offer that's anywhere from one-third to half of what the original amount was. Be prepared for this to take some time and a few phone calls. Once you get an offer that you can agree upon, make them send it to you, in writing, before sedning them a money order. Keep records of this tranaaction forever as it very well pop up again in the future.


In the end, it's up to you to make the decision to consolidate your debt and become debt free. If you do decide to do your debt consolidation on your own, get started right away and find an accountability partner to increase your chance of success.