Making Debt Consolidation Work for You
It’s no surprise that in today’s economy more and more people are finding themselves with climbing debt and less and less money in their bank accounts. With the financial crisis that is flooding the world it is increasingly important to know what options are available to the average consumer to handle their mounting monthly obligation. Consolidation done wisely can be the light at the end of the tunnel that so many of us are struggling to find.
The first step to consolidation is actually figuring out what you owe, what your minimum monthly payments are, and what interest rates you’re paying. There are two main goals with consolidation: lowering your overall interest rate, or lowering your total monthly payment. There is no point in consolidating debt if you’re going to increase either of these two things, with the one exception applying to promotional interest rate offers. Be sure to check the rates particularly on your credit cards; interest rates can fluctuate depending on the type of transactions that are done with a credit card, and depending on whether or not you’re involved in a promotional situation. With special offers on credit cards consider whether or not you’ll be able to pay the balance in full before the low rate expires. Be honest with yourself; if the answer is no, then that balance should be included in your consolidation.
Once you have all of your financial information gathered in one place, make a list with four columns. In the first column list all of the bills you would like to consolidate, in the second list what interest rate you are currently paying, and in the third and fourth columns list your required minimum monthly payment and what you are actually paying every month. Consider whether or not you make larger than your minimum monthly payment, only to turn around and use the money you’ve put on your card right away. If this is case, your minimum monthly payment and actual monthly payment should be the same, because in reality you are not paying anything additional off on your credit.
With all of this information listed in an easy to read chart, it’s time to head into your local financial institution. Some places will require that you make an appointment to come in for a face to face consultation to discuss your situation, and some will allow you to go through this process over the phone. Consider what is available to you, and what will be easier. If you are a single mother of four, maybe a telephone appointment will be more convenient; if you are a very visual person, meeting with someone who can show you their analysis may make this a smoother process.
Finances can be stressful and emotional, so anything you can do to feel more comfortable at your appointment is in your best interest. Try to keep an open mind, and remember that you may not walk away from your meeting with a solution immediately. A financial analyst will want to review all of your options to find the one that will be the most cost effective and will put you in the best financial situation possible.
The two most common solutions for debt restructuring are a regular consolidation loan or a mortgage refinance. With a mortgage refinance, the biggest requirement is that you live in a home that is either paid for completely, or else has enough equity built up to cover your debt. Equity is calculated by finding out how much your home is worth, how much you owe against the property, and then subtracting the two numbers.
If you have more equity in your home than you do additional debt, you may be able to roll everything into your mortgage. The benefits of utilizing your mortgage in this type of situation are many. The biggest reason for using your home to finance your debt is the ability to greatly reduce your required monthly payments. If you need to increase your cash flow this will be the easiest way to do so. Add to that the fact that mortgage rates are often significantly lower than loan rates, and mortgage refinances quickly become a very attractive option for consolidation.
If you don’t own your home and are looking to consolidate, then a consolidation loan is the next best thing. Consolidation loans generally have higher rates than regular loans because they are often unsecured, posing more risk to financial institutions. Despite having a slightly higher rate they are often at least ten percent lower than credit card rates, meaning you will certainly pay off your debt faster.
By knowing what your monthly minimum obligations are and what you realistically have been paying every month, you can easily compare the effects of a consolidation loan to unconsolidated debts. Often people are making interest only payments on many bills, or are paying an almost negligible amount towards their principal owing. If you can make the exact same payment to a consolidation loan at an interest rate that is ten percent lower (or better), then you can expect to pay off your debt much faster. If your goal is to lower your monthly payments rather than paying off your debt faster, you can have your financial institution place your loan over the maximum length of time allowed (often seven to ten years).
The most important thing for the average consumer to realize is that there are always options. If you are finding yourself staying up at night, worrying how you are going to pay your bills and when you’ll be out of debt, it may be time to consider consolidation. Contact your local financial institution and find out what they can do for you. After all, the bottom line is that companies want to get paid, and if there is a way to make that an easier process, any financial institution will be eager to help you along.