Saturday, June 27, 2009

How to consolidate a debt?

Earlier I write on a post about what debt consolidation is. You can read about it here. You can also go to this nice web site to learn about debt consolidation.

So how do you go about consolidating your debt?

1. Separate bad debt from good debt. Read here about what debt is necessary and what is not. You can read about that here. To make things simple, debts such as home loans are considered good debts and are generally long term debts that have lower interest rate. These debts will not be a problem for you.

However those credit card debts, consumer loans,student loans or loans that you have taken to to buy the latest trendy items are considered bad debts. They are generally have high interest rate and are the ones that will give you the most difficulty.

2. Take all your bad debts and make a summary of them. It will be easier if you have the amortisation schedule for all your bad debts. The amortisation schedule is a document that you can obtain form your lenders. Determine the capital and the interest that you are paying every month and the total capital and interest that you will pay until you have paid all the debts. You will also need to find how long it will take you to finish paying those debts. Calculate the total monthly payments that you have to make every months.

For examples: Lets say that you owe $ 25000 from various lenders and that you will pay it all in 5 years. In all you will pay $ 10000 in interest. You also find out that you pay a total of $ 500 of which 300 is capital and 200 is interest. ( Ok I make this example out, the maths may not be correct)

I am assuming at this stage that you are not going to take on additional debt.

3. I am assuming at this point that you have make a budget and that you have tried out to pay your debts by yourself but have not been able to do so. But it is good at this point to determine what is the maximum amount that you can pay every month.

4. Now is the time to get your loan consolidated. You will have to shop around for the best loan. The company would consolidate all your debt and as a result you would now have only a single debt with a single monthly payment. This debt is a secured one since it will be backed by an asset that you have such as your house, as a result it would have a lower interest rate. The process is simple. The company will either act as an intermediary between you and the lenders or will just buy the debts and as a result you will now be their debtor.

5. Norma
lly when you consolidate your debt you will pay it back in less time than if you would have paid all your debts individually. You will also pay less interest on the debt.

A piece of last warning though, if you are too deep in trouble, consolidating your debts may not make any difference. Especially if you have a lot of debts. So be careful.

Did you have your debts consolidated? Was it easy or difficult? Please share your experience with us so that you can help others. Thank you.

Stay away from credit card?
The snow ball. A better way of reducing your debt.
How to live within your means
Good debt or bad debt. Can you make the difference?
Credit card debt - The investors worst nightmare
What is debt consolidation?

Bookmark and Share

No comments:

Post a Comment