Debt has a nasty habit of running away with us, and it is all too easy to find, one day, that we are spending every spare penny on interest simply to keep our debt at the same scarily high level without ever reducing it. This can happen when credit card providers increase limits when you take on an extra card because it is offered, or if you have one or two – perhaps three or four – credit accounts with online shopping sites. Suddenly all this largesse gets on top of us, and we begin to sweat about how much we owe.
Consolidating all that debt – i.e. rolling all those owed amounts into one large sum which is still often very much lower than the total of all the individual amounts we are currently paying, is a tempting, and sometimes a very sensible, prospect. The right debt consolidation loan could save you a lot of money and make managing your monthly repayments easier. source – Growing Power.
Not only will this clear all our accounts and credit cards in one fell swoop, but it will also leave us with more money to spend on the things that we need to live comfortably – perhaps even allowing for some saving!
If you can do it yourself, by taking out a loan with a reputable bank or similar institution, then this is the best way to go. There are some points to take into account when choosing a loan:
How much will you repay?
Look at the monthly repayment figure, certainly, but also keep an eye on the APR – if it goes too high, you might end up repaying the loan for longer than you would like to, especially if interest is added on an ongoing basis, rather than calculated up-front and applied to the loan amount as a one-time charge. Ensure that you are comfortable with both the monthly amount, and the total length of the time that the loan will run, taking into account any changes in your circumstances, a child coming of age and needing a special holiday or present, for example, a retirement by which time the loan must be done, and so on.
Are there any penalties
Make sure you know what will happen if you make a payment late, or do not have sufficient funds on the day the payment is due. If the penalty is significant or will otherwise blemish your credit rating, then make sure that you make a plan to cover the payment rather than risk your financial credibility over a temporary cash-flow blip.
Understand how the loan works, as mentioned above, so you are aware if interest will go on to negate a certain amount of each repayment, or not. The fine print is quite dull, but it is important, so do take the time you need to read through the whole document before you sign it.
Pay off all accounts in full
Once you have secured approval for your consolidation loan, you should note the amounts owed on all your accounts. Take your time over drawing up the list to ensure that you do not accidentally leave any accounts off the list. Then, phone or email each and every company asking them for a settlement amount. This will be the full amount owed including any interest already accrued, but not yet charged onto your total.
If the loan will take a little time to come through to your bank account, make sure you ask if the settlement figure will still be valid at that time. There is little more frustrating than thinking you have cleared an account, only to find an interest charge popping up on the next statement. If this does happen for any reason, make sure you pay it off as soon as possible – but it is far better to avoid such annoyances if possible.
Once your credit cards are all paid off, and those online shopping accounts have large balances available to spend on them again, it is shockingly easy to be tempted into buying a couple of things here, and an outfit or two there – but resist this temptation!
If you genuinely need items, include them in your budget for the following month and pay cash. If you like to use a credit card for the extra layer of protection, do so, but then pay off the card immediately, or before you are charged any interest for using it – this way you will get the best of both worlds: protection for your shopping and no interest to pay.
To summarise, using a loan to consolidate your debt can be an excellent way to manage your finances, but you must, at the same time, re-educate yourself about your spending so that you do not end up in an even worse situation: maxed out accounts and cards and now a loan to pay off too! Do some online research, speak to your loan provider about money-management classes or online courses that you can take – or simply work out your monthly income and ensure you live well within those means. Debt can be reduced and managed, it can be a long hard slog – but it is definitely worth it!