Debt consolidation involves the conversion of all your high-interest rate debts into relatively lower-interest rate debts for reducing total interest costs. Homeowners who are having a huge load of credit card debts and are having unused borrowing power specifically on their home could opt for debt consolidation as per https://www.forbes.com.
The most common question is when is the best time to opt for a debt consolidation loan? Individuals who are under the stress of ever-mounting debts are overwhelmed and perplexed so they seem to constantly ask this question. They consider their finances and the available options and are totally confused about this financial mess they seem to be in. Is taking out a debt consolidation the right step for them or should they continue to eliminate debts on their own? Unfortunately, there is no simple solution to this grave debt issue. Opting for debt consolidation is completely a personal preference that is primarily reliant on your financial and personal context. Here are some of the things to consider before opting for a debt consolidation loan.
Are You Living Within Your Means?
As per https://www.cnbc.com consumer debt seems to have grown rapidly from 2012 and it is poised to go up to $4 trillion which is definitely a new high by December 2018. So the lesson we must learn is to spend very much within our means.
The only way of finding out whether you are spending less than what you are actually earning is by writing down all your expenses in a month and then taking stock of the situation. You would be able to determine exactly how much you are spending if you keep track of each and every spending for a couple of months or so. Once you know if you are overshooting your earnings, it is best to cut down your expenses by figuring out precisely which expense to eliminate at the beginning. You must ensure that your monthly budget is nicely balanced. This implies that you must not spend more than the amount you are earning every month. Moreover, you must carefully keep track of and even control all your seasonal and annual expenses.
Do You Know about Your Annual and Seasonal Expenses?
You must meticulously examine last year’s seasonal and annual expenses and also, clearly make all your plans for the current year’s seasonal and annual expenses like vacations, car maintenance, insurance, home maintenance, Black Friday Shopping, Christmas gifts, clothing etc. Once you arrive at your total seasonal and annual expenses, you must divide the total amount by 12. This way you could get average spending for every month, so add this amount to your monthly budget. If you are really focused on eliminating your debts, it is best to keep this amount aside in your bank savings account without fail, every month. This would help you to manage these expenses when they come with your own money rather than relying on loans or credit.
Do You Have an Emergency Fund?
A perfect plan would always include strategies to manage an unanticipated thing like urgent financial requirements and certain life events. To manage financial emergencies, an individual must ideally keep aside an amount equivalent to living expenses for six months besides the funds kept aside for seasonal and annual expenses. Even though you are pretty eager to get out of debts as quickly as possible, it is a good idea to chalk out a strategy to succeed which most probably would be time-consuming.
Always remember that emergency funds are meant for real emergencies. You must refrain from using them whenever you are in trouble for overspending in a month. To ensure that this amount would be present when you really need it, you must consider setting up a separate savings account in your bank meant exclusively for emergencies and ensure that you are ruling out any direct access to this emergency fund from any of your debit cards. Consider browsing through debt consolidation reviews online to get an idea about how to successfully deal with debt.
How Much Money Can You Afford to Pay towards Debt Repayment Every Month?
Once you are successful in reducing your annual, seasonal, and monthly expenses so that you do not end up spending more than your earnings and when you are undertaking a savings program for handling emergencies, you need to figure out the exact amount you could afford to pay towards debt repayments every month. If this amount is not adequate for making minimum payments on your two credit cards and line of credit, it is best to reconsider and try to cut down your monthly spending slightly more to accommodate the shortage of funds for monthly debt repayments. The best thing about a debt consolidation loan is that you could pay off your debt in a fixed time frame. If you are able to avoid using credit, you could hope to eliminate your debt once your payment term ends.
Will You Get Better Interest Rates on Your Debt Consolidation Loan?
People usually opt for a debt consolidation loan for combining their multiple payments into one single monthly payment. However, that does not seem to be the primary reason they opt for debt consolidation. They do it for reducing the amount they pay toward interest on their debts that could save them substantial amount both currently and later on. Before signing a debt consolidation contract, be sure that the loan would be lowering your interest rates.
The best thing is to compare the loan offers from different debt consolidation agencies and ensure that you are availing a debt consolidation loan with the lowest possible interest rate. This would effectively reduce the overall interest payments made by you. Concentrate on boosting your credit score by simply paying off your debts timely and also, paying off all your interest payments promptly.
Eliminating debts completely could be an achievable task provided you are able to appreciate the bigger picture and understand clearly your financial situation. Moreover, you must find a capable and reliable debt consolidation partner to provide professional assistance and guidance every step of the way.