Choosing debt consolidation loan as your debt relief program should not be done without careful analysis of its process and effects. You need to know everything that you can about it and your other options to make sure that you are being smart about how you will get out of debt.
One of the debts to benefit greatly from this debt relief method as high interest credit card debt. Consolidating credit card balances under one loan is a great way to help consumers pay down their debt without worrying about paying too much on interest. At least you need to ensure that you will get a low interest loan. There are requirements that is needed to make it happen and if you have them, then debt consolidation loan may just be what you need to achieve debt freedom.
However, some people fail at this because once they get the loan, they fail to follow through with the plan. It is very important that you know the whole process before and after the loan approval so you can avoid committing the common mistakes in this debt relief option.
What is the process involved in debt consolidation loan
The process of debt consolidation loan is very much like that of any loan that you will apply for. You practically need to have the same qualification and requirements to make it work for you. This is one of the debt relief programs wherein you will not have the luxury of having a professional help you. That is all the more reason for you to do your research and know what is involved in order to maximize the benefits of this program to your financial life.
Here are the important steps to implement debt consolidation loan.
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Know your debts. Begin by listing the amount of money that you owe. Separate the debts that you can pay off without being charged a prepayment penalty. Enumerate them and total the debts that you can pay off immediately. This will be the basis of the loan amount that you will apply for.
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Compute how much you can afford as a debt payment. This is where a budget plan becomes necessary. Identify your income and expenses. Trim down your daily costs to get the most savings out of it. Make sure not to include the debt payments that you can pay off immediately with the loan that you will get later on. For the debts that have prepayment penalties, you can still include them in your monthly expenses list. Deduct the lean expenses list from your net income and whatever is left will be your debt payment fund. This will be your basis for the monthly amount that you can afford to pay for your loan.
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Average the interest rate of the debts you are planning to pay off. You want to know the interest rate that you need to target for the loan that you will apply for.
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Look for a lender. At this point you have everything that you need to make a smart selection on your loan and the lender that will provide you with it. For special loans like student debt, you can check out specific loan providers like the US Department of Education. StudentAid.ed.gov is a website that can help you with this.
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Choose the lender with the best terms. Check out the terms of the loan like the payment period, the interest rate, processing fees and other requirements. Fill up the application form.
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Prepare and submit required documents. Together with the application fee, submit the required documents as requested by the lender. These include documents that will prove that you have the capabilities to pay off what you owe.
What to do after your loan is approved
The key to succeed in debt consolidation loan is not in the preparation but in what you will do after you get the loan. Sometimes, people spend it on something else. This is a temptation that you should never give in to. Here are the things that you must do once you get your loan approved.
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Pay off your debts as intended. When you get the check for the loan that was approved and you have encashed it or deposited it in your bank, take out the debt list that you created beforehand. Pay off the debts listed there as you intended and do not use it for something else. Do not stop paying until all the debts on the list are crossed out.
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Adjust your budget plan. As you wait for the lender to approve of your loan, you should have the details of the loan and the possible monthly payments that you will be required to commit to. Adjust your budget plan to incorporate this new payment so that you will never miss it.
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Choose which credit card account you will close. Do not keep all the credit cards that you have paid off. Choose only one card to keep and cut off all the rest. This will lower your credit score a bit but once you make diligent payments on your loan, it will go up once more.
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Pay off your loan on time. You want to stick to your payments this time to avoid incurring any more losses on your debt.
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Grow your income to boost savings. You also need to increase your income so as to build up your savings. This will help ensure that you will never be put in debt because of an emergency situation. You can find other sources of income so that if something compromises your main salary, you will not be left with nothing. Remember that a lot of things can go wrong in a matter of years. Debt consolidation loan usually takes a long time to complete – especially if you refinanced your home to get a low interest loan.
Follow all of these steps to the letter and you should be able to implement debt consolidation loan and reap the benefits of this debt solution.