If you want to get out of debt on your own, one of your options is debt consolidation loan. In fact, people who have no idea about debt solution immediately think that getting a loan to pay for your multiple credit accounts is the logical way of paying your dues. It seems like the easiest way to get out of debt is through this method.
What debt consolidation loan does is restructure your debt payments so it becomes more manageable. The goal is to give you a lower monthly contribution through a single payment plan. That will help you meet the payments and keep you from feeling too restricted in your budget. Hopefully, this new arrangement will help you stick to your payments until you are completely debt free.
However, some people find that this debt solution is not always effective because it does not really solve the problem. Using a debt to pay for another can be risky. But if you follow the right steps, it can give you debt freedom.
5 simple steps to use loans to gain debt freedom
To make debt consolidation loan effective, you may want to go through the following steps strictly.
Step 1: Identify the debt amount that you owe.
First of all, you have to know how much money you need to consolidate. There are some debts that have prepayment penalties. This means you are not allowed to deviate from the original payment plan – even if it is an amount that is greater than your usual monthly contributions. You will be penalized for this. Obviously, you have to exclude these. Use an online debt consolidation calculator like those from MSN.com or Bankrate.com to determine how much of the monthly payments you will end up paying. Check if it will be lower than the amount that you are currently paying.
Step 2: Understand your current financial condition.
Now that you know how much you owe and what you can include in your debt consolidation loan, you should look at your finances next. You want to know how much you can qualify to apply in terms of a loan amount. If your income will not allow you to get a loan that is enough to pay off all your debts, that means you will have to prioritize your list. Or you probably should opt for another debt solution. You can use the results from the online debt consolidation loan calculator to determine if you can afford the payments.
Step 3: Select the right loan.
The third step if to choose the loan that you will apply to. You need to check two things: your personal assets and your credit score. If you have a good credit rating, that will give you a low interest rate. If you have a bad score, then you should check if you can borrow money against your home equity. You can either choose a personal loan or a secured loan – depending on your requirements. This step also includes your lender selection. Choose the one that can give you the best terms and rates.
Step 4: Pay the debts that you intended to pay.
The next step is to pay the debts that you intended with the loan. This is where most people encounter some problems. When they get the loan, they are tempted to spend it on something else. Make sure it only goes to your debt payments. That will help you keep your debts from growing.
Step 5: Commit to paying off the loan.
When you have the debts paid off, you should commit to paying the loan strictly. This is very important. Some people think that they have solved their problems because their credit cards are back to zero. They are tempted to use it again. You have to overcome these temptations so you do not add more to your debts. Create a payment plan that will help you stick to the schedule. Do not miss your due date so you can avoid any penalties.
Following these steps will help you make debt consolidation loan an effective way out of your credit problems.
Signs that consolidating debts through a loan is enough
Here are the signs that using a loan to consolidate your debts is the right solution.
You have a steady and stable income. Any type of loan that you will apply for will require you to have an income. The lender needs to be assured that you have the capabilities to pay off the loan. This is an important requirement in any loan application. Not only that, this will not give you debt reduction so you have to be able to afford the payments on your full balance.
You have a good credit score and you want to let it stay that way. A good credit rating will make you a low risk borrower in the eyes of a lender. That will prompt them to give you a low credit score.
You have a collateral. Another way to get a low interest is to use a collateral for a secured loan. But of course, that will endanger the collateral in case you fail to pay off your loan.
You have the discipline to stay away from debt. Since there is no professional helping in debt consolidation loan, you will have to do things yourself. That includes learning how to stay away from debt on your own.
You have to consider the qualifications that you have to possess in order to maximize the benefits of this debt solution. There is more than one way to consolidate debts – like balance transfer or debt management. If you do not qualify for debt consolidation loan, you can opt for alternatives.