There are so many debt relief options that can effectively help people get out of credit card debt. In fact, you will find at least one solution for any type of financial problem involving credit, may it be home loans, student loans or auto loans. It is probably safe to say that the real challenge at the beginning of your journey towards debt freedom is choosing the type of program that you will use.
One of the options that you have to get out of credit card troubles is debt consolidation loan. In fact, an article from DailyFinance.com revealed that 15% of survey respondents indicated that they considered credit card debt consolidation as a solution. This survey was done by Credit.com and it showed that the three debt relief programs that people prefer are debt consolidation (15%), credit counseling (8%) and bankruptcy (8%). The article mentioned that although consolidating debt is the most popular option, it is tricky to do.
Among the benefits of debt consolidation loan is giving you a lower interest rate. Whether it is a personal loan or a secured loan, these are usually offered with a lower interest compared to credit cards. Not only that, having put your debt under one lender will make the monthly payments easier than before.
This is as simple as you can get when you are trying to solve your credit card problems. However, it is also a fact that some people fail to achieve total debt freedom with through this method. The culprit is not really debt relief process – but more of a failure to implement the program completely.
3 stages you have to complete when using a loan to consolidate credit
When consumers decide to use debt consolidation loan to pay off their debts, they think that it is enough for them to get a loan and pay off their multiple debts. They stop monitoring their progress after paying off the multiple accounts. This is not the right way to do it. In most cases, the downfall of people using this debt relief is in mixing up the stages or completely ignoring one of them.
There are many steps to follow when using debt consolidation loan but we have cummed them up into three distinct stages.
Stage 1: Getting ready to apply for the loan.
In most cases, this is where people usually breeze over. Well here’s our suggestion: take your time. Do not rush into this stage because it can set the pace of your journey towards debt freedom. If you do this correctly, you will find that the other stages will be more effective. So what happens in this stage?
You figure out the depth of the debt problem. The very first thing that you do is to analyze the problem. What are the type of debts that you have? You can combine just about any debt through this option.
You calculate your average interest rate. This is important because you want to target a lower interest rate for the loan that you will apply for.
You compute the exact amount that you need to borrow. Some people make the mistake of borrowing more than what they really require to pay off their debts. This is wrong because you will be increasing your total debt amount. Stick to the amount that you really need and leave it at that.
You create a new payment plan. Before you even apply for a loan, you have to create a payment plan that will ensure that you have the money to pay for it. This will help you plot how much you can put aside for your debt payment fund and how long you have to do it.
The whole purpose of this stage is to ensure that debt consolidation loan is the right debt solution for you. It will also help you set up the guidelines that will get you started on the next stage.
Stage 2: Applying for the loan.
The next step is to proceed to apply for the loan that you will use to pay off your debts. Having completed the first stage, you now have an idea of how much you need to borrow, what type of loan you will get and how you will go about the payment process. So your next tasks will include the following:
You finalize the type of debt that you will use. It is important for you to determine if you will get a secured loan or stick to a personal loan. While a secured loan has a lower interest rate, it can endanger the asset that you will put up as collateral (e.g. you home). On the other hand, a personal loan can have a low interest but only if you have a good credit score. Stage 1 would have determined which type of loan will suit you best. If none of them is your best option, then go for peer to peer lending. It can be a great source of loan too.
You search for the best lender. Knowing the loan type will help you look for the lender who will provide it to you. Look into various lenders so you will have options. Simply compare the interest rates and the payment terms that they will require of you. Using the payment plan you created in stage 1, you will proceed to compare the terms provided by the lender. It it turns out that you can afford it, then you can proceed with the application process.
You complete the requirements and submit your application. This is actually self explanatory. Depending on the lender that you have chosen, complete the required documents and forms and submit it to them. Prepare the costs involved in the application process.
At the end of the this stage, you should have successfully applied for the loan with the right lender who will give you terms that you can afford.
Stage 3: Paying off your multiple debts.
The third stage begins when the lender approves of your loan application and sends it to you. As soon as you get the money, these are the things that you need to do:
You divide the money you got from the lender. This is the first thing that you will do. You have to look at the debts that you will pay off and divide the loan amount so each debt has a fund.
You send the money to your multiple creditors. Immediately after you have divided the money, send it to the creditor at once. You want to make sure that you complete the first two options, if possible, within the day. That will ensure that you will not spend the money on something else.
You set up automatic payments for the loan. A lot of people fail in this debt relief option because after paying the multiple debts, they think it is all over. You should make sure the payments for the new and bigger loan is set before you really relax.
You keep yourself from more debt. Without a doubt, debt consolidation loan could be your path out of debt slavery but only when you are successful at it. When we say successful, that does not only mean completely paying off the debt. It also means staying out of it. You have to control your spending to make sure that you will not add more debt to your balance.
These three stages have to be complete correctly so that you can really get out of your financial problems.
Important considerations before applying for a loan to solve debt troubles
In truth, there are financial experts who do not agree that debt consolidation loan is a great way to get achieve debt freedom. Dave Ramsey expressed his thoughts about this debt relief option in his website, daveramsey.com. He went as far as to say that this debt solution is a “con” for the simple reason that it does not really solve the debt problem.
Of course, there is some truth to that but the goal of debt consolidation loan is not to pay off your debts but to restructure your current balance. You will shift it to one lender so you end up with a single payment every month. Sometimes, people only need to restructure their payment plan to make better progress when it comes to debt payments.
Dave Ramsey also mentioned that consumers should be cautious of the low interest rate. This is true but sometimes, the longer payment plan of this program will end up costing the consumer a higher interest amount.
The bottomline is, if you want to get out of debt, you have to know what your other options are before you finalize your decision. If you are sure that the best option is debt consolidation loan, make sure you follow and complete all three stages.