The debt consolidation process can save you money on interest and help get your credit back on track
Up to this point on the blog, I’ve talked about how to save on everything from vacations to homemade cleaning products. The Frugal Grandma wasn’t always so good with her money though, there was a point when I spent way more than I earned. Sometimes all the money saving tips can’t keep you from that impulse shopping binge that throws your financial life into chaos. When that happens, the debt consolidation process might be your best way back from the brink.
So you backslide a little on your finances. Even your Frugal Grandma has had a lapse or two in the past. There is help though to get you back on track if you stray too far.
Your answer, and the way back on track, may be found in the debt consolidation process.
What is Debt Consolidation?
Loan consolidation is taking out one big loan to pay off all your smaller ones. You might include your car payments in this if the loan is fairly small but you usually don’t include your mortgage. The consolidation loan is usually done either through a third-party credit counseling agency or the do-it-yourself system through a peer loan.
I know, it seems weird that taking out another loan would help you get your finances back on track but it does work. I know first-hand how the debt consolidation process works and how it can help boost your credit score.
Debt consolidation through a peer loan is the easier path but doesn’t include the counseling service that some people may need. You just apply for a loan on one of the peer lending platforms and then pay off your individual debt. We’ve talked about how to get a peer loan on the site, even for those with bad credit.
Peer lenders are still requiring pretty high FICO credit scores, usually above 640, so an alternative is a personal loan through Avant if your credit score is lower. Avant doesn’t charge an origination fee, which can be as high as 5% even on the peer loan sites, and accepts borrowers with credit scores as low as 580 FICO.
Getting a debt consolidation loan from a credit counseling agency is the old school method but offers a little more help in the process. Understand that not all agencies are created equal. Look for non-profit credit services that are a part of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling agencies (AICCCA). These groups have higher standards for counselors and you are more likely to get the advice you need.
Some financial guru´s shun the debt consolidation process because they say it is a salve over a wound but not a cure. Consolidating your debt may put a little extra money in your pocket at the end of the month since you’re making one payment instead of many, but you still need to manage your money. Use your debt consolidation as a tool to get back on your feet and not as a way to spend more.
The Debt Consolidation Process Explained
After you’ve decided where to go for your debt consolidation loan, it’s time to start the process. You’ll need to put together your spending over the last three months to see where the money is going. A debt counselor will help you see where you can cut your spending to avoid overspending in the future.
Next, the debt manager will ask for your credit cards and he will have a very large set of scissors. It only hurts for a moment. Don’t try keeping any cards out, not even a small department store card. The credit counselor will probably find it through your credit report and you may not get the loan.
You’ll be left with one emergency card. This will be used for that emergency car repair or for hospital visits. You and the debt manager together will attempt to work out all your debts so everything can be paid in one payment. Your counselor is going to find a way to pay all your debts within three to five years.
This is the biggest disagreement I have with credit counselors. They’ll tell you to totally avoid debt and to absolutely not use any credit cards except in case of emergencies. Using credit is the only way to improve your credit so neglecting it completely isn’t going to help. You might pay off your debts eventually but your credit score will still be crappy and you’ll pay high rates on any loans you need. Use your credit card each month, only for necessities and pay it off monthly to avoid interest charges, and you’ll start improving your credit score.
Besides getting the credit counseling that will help avoid repeating your bad credit habits, debt consolidation also offers the opportunity to negotiate a lower rate and debt. Your creditors don’t want to force you into bankruptcy where you might not pay them anything. Your credit counselor is going to try negotiating with your creditors for a lower interest rate and maybe even to lower the amount owed. The debt consolidation process will cost between 3% and 5% of the loan amount but the benefits usually outweigh the costs.
The debt consolidation process can take several months if you work through an agency but you’ll save money in the long-run. You save on paying interest on negotiated debt, late fees and all the individual fees you might have to pay. You sleep better because you’re not trying to juggle bills in your head. Getting a personal loan to consolidate your debts will take less than a week and may be a better solution for someone that doesn’t need the debt counseling.
Using the Debt Consolidation Process for Financial Freedom
Once you’ve consolidated your loans, your payment is fixed for the next three or five years. Keep to your spending program and check in with your credit counselor if you feel like you’re falling from the path. Your credit report will reflect that you’re making payments through a third-party credit agency and some creditors may think twice about giving you new credit, which is probably a good thing anyway.
You won’t have this problem if you just go the personal loan route to pay off your debts. Creditors will see that you paid off all your previous debts and are making payments on a single loan.
Used correctly and debt consolidation can save you big money. The graph below shows a hypothetical situation starting from $25,000 in debt on a 21% interest rate and payments over ten years. A debt consolidation that can reduce the debt to $20,000 and get your rate down to 13% can end up saving you almost $60,000 over ten years.
This is where you really have to make a commitment to a better financial future. Are you committed to your long-term financial goals? Do you want to kick the paycheck-to-paycheck curse and eventually have the freedom to go on vacations and relax in retirement?
Check your rate on a debt consolidation loan from Avant Credit – Click Here
Are you ready to take this step? The debt consolidation process isn’t an easy solution but it can be a great tool to get back on track to meeting your financial goals. Only you can decide if you’re ready to commit to the process but I promise you’ll be so happy when you do. Frugal Grandma