Debt consolidation is sometimes used as a tool by consumers, reducing debt with lower interest rates and smaller monthly payments; they can now pay down the principle at an accelerated rate. If they roll higher interest loans into a smaller interest loan, they can utilize the money they save each month to pay down the principle on the loan. By doing this, they can often pay the new loan off in a shorter period of time than the loan was taken out for.
Managing the debt becomes easier, as now you are making one monthly payment instead of the several loans or credit card payments that you were paying before the consolidation loan.
Take Charge of Your Debt
In the first month of 2010, statistics from research firm TNS stated that 64 percent of us feel bad about the economy and our personal finances. This report went on to say that almost 70 percent of the consumers will work to cut down on personal spending within the first six months of the year.
Because people are worried about keeping their homes, paying higher taxes or staying employed, they want to be proactive in reducing their debt and are trying to manage interest rates and build savings accounts.
A popular option is utilizing a consolidation loan. The attraction for a consolidation loan comes with a reduced interest rate and smaller monthly payment.
Debt Reduction Plan
Utilizing the consolidation loan to reduce your debt is a simple formula. First you write down the loans you want to consider for this plan. Then you research what your current interest rate is, your overall balance for that loan and how much your monthly payment is.
Once you’ve figured out what you are currently paying and at what rate, you look for a consolidation loan for the amount you need. The loan may be an unsecured loan taken at a bank or credit union. This type of loan is generally for less than $5,000 and has a payback period of two to three years. Or you may be refinancing a car or other secured debt and adding in a couple thousand for the consolidation loan. A third option is to roll the consolidation amount into a first or second mortgage.
After you’ve received the money for the consolidation loan, you pay off the list of debts, starting with the debt with the highest interest rate. Now you have one, smaller monthly payment.
The next step is very important in the debt reduction plan. Take the amount left over. The amount that is the difference between what you were paying on those loans and the amount you are paying now. For instance, if the total of five credit card payments was $250 a month, and now they are consolidated into a loan that is $125 a month; your difference is $125 a month.
Add some of the extra $125 to the monthly payment of the new loan. Even $135 a month gives you $10 more towards the principle and can make a huge difference in how long it takes to pay off the new loan. Then, take at least part of the $115 that is left and put it in a savings account.
This only works if you stop spending in other areas. If you paid off five credit cards, consider canceling four of those cards and put the fourth one away for emergency purchases only. Choose the cards that have monthly fees or inactivity fees. Make sure that you ask the credit card company to report to the credit bureau that the card was canceled at YOUR REQUEST. Otherwise if they just cancel the card it might have a negative impact on your credit score.
Summary
Debt Consolidation is often considered an option when people are worried about the future. They start looking at their debt and trying to manage their outgoing expenses. Using debt consolidation as a tool to get out of debt is a viable process, but can cause more problems if not handled right.
It is important that if you get a loan to pay off smaller loans that you take the money and actually pay off those loans. Don’t get the money for consolidation and decide to go on vacation. This leaves you with all the old loans and a new payment. You‘d be surprised at how often this happens.
Also, once you’ve consolidated, don’t charge up more debt. Cancel credit cards, pay more money on the principle and start a savings account. Let Debt Consolidation be a tool in your cache of weapons to eliminate debt. Use it as a strategy that helps you reach your ultimate goal of living as close to debt free as you can get.