If you’re in debt, you’re probably like most people: you want out.
While there are many ways to pay off debt, one of the most popular is to set up a consolidation arrangement. But, consolidation arrangements can be risky if you don’t know what you’re doing. Here are some tips to make sure that you don’t end up with more debt that you can’t pay off.
Some Consolidations Are Loans
While many debt consolidations don’t use loans, some do. A debt consolidation loan can make sense if your primary problem is high interest and fees being charged on your current debts. A high-interest debt or a series of high-interest debts, can be wiped out using loans by Direct Axis, for example.
A single large loan, that pays off several smaller loans and which has a lower interest rate than those other loans, will save you money in the long-run.
Plus, by lowering your total payment amount, you get the benefit of being able to make additional payments on your debt, accelerating the payoff. By using a simple debt repayment calculator like unbury.me, you can get a good idea of just how much of an effect this will have on your repayment schedule.
When Your Consolidation Is A Third-Party Payment Agreement
Most consolidation agreements are third-party repayment systems. If you can’t juggle multiple debts, a third-party will offer to do it for you, with a catch. They usually charge a fee (more on that later) to help you, and sometimes they negotiate with your creditors to reduce the total amount of debt you have to repay, and you send them one payment every month instead of sending multiple payments to your creditors.
These types of agencies don’t make loans though. They aren’t lenders. They usually have preset arrangements with financial institutions or they have relationships with financial institutions that allow them to negotiate debts.
Some agencies don’t negotiate the debt amount. Rather, they renegotiate the interest and fees for you. This means that more of your monthly payment goes towards reducing the principal amount, rather than the interest on the debt.
When possible, you should try to renegotiate your interest rate before you negotiate the debt itself. Why? Because negotiating the repayment amount (total debt) will negatively impact your credit whereas negotiating the interest rate won’t. In fact, it could help your credit rating.
Get Debt Counseling
In most cases, you will need debt counseling before you’re allowed to file for bankruptcy, but sometimes, agencies will require you to go through debt counseling before they agree to work with you.
Even if they don’t require it, it’s probably a good idea because you need to develop better spending and saving habits. After all, the reason you’re considering a consolidation is because you can’t handle the debt you have or it has become burdensome.
Stop Using Credit Cards Until You’ve Changed Your Spending Habits
Stop using credit cards until you’ve committed to changing your spending habits. Most people get it into their heads that credit cards are evil. This is not true, but they do open the door for temptation. The real problem is spending habits. If you develop good spending habits, there’s no reason you can’t use a charge card and pay it off at the end of the month, incurring no interest. Some of these cards offer bonus or rewards points too, meaning you get added benefits just for charging something to the card.
If that benefit is a cash-back reward, then it means you’re essentially getting a discount on everything you purchase. As long as you don’t let the balance accumulate, you’re going to be fine.
But, this assumes that you’ve changed your spending habits. During the consolidation process, your focus shouldn’t be on getting a reward. It should be paying off the debts you’ve accumulated.
Shop For Agencies
Not all agencies are alike. Like any business and industry, quality varies. So, check to make sure that the organization belongs to the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Also make sure they’ve passed the rigorous standards set by the Council on Accreditation for Children and Family Services Inc.
Watch The Fees
Some of these companies charge you between $700 to $1,000 and settle your debts for $0.40 to $0.60 on the dollar. Then they charge you a percentage of the settlement amount. Now, you might have noticed something about the fee structure.
When you don’t have a lot of money, and you’re behind on your debts, $700 is a lot of money.
Leon L. Wood is a personal finance consultant. He enjoys sharing his financial insights on the web. His posts are available mostly on money and finance sites.