You’re indeed in a bad financial situation if you have multiple debts with high-interest rates that you can barely pay anymore. If you’re experiencing such financial difficulty, it’s time to seek help to get back on good financial footing again.
There are two options you can take to pay off your debts and reorganize your finances: debt consolidation and debt counseling. Most people sometimes get confused between these two, and some think that these debt relief options are the same.
So, before you choose either of these two debt-relief options, it’s a must that you know the differences between debt consolidation vs counseling.
Debt Consolidation: What is It?
Debt consolidation is an act of getting a new loan to pay off multiple debts. After you have paid these debts, you’ll now only be paying the debt consolidation loan – that’s a single monthly payment. The thing to be kept in mind here is to choose a low-interest rate loan. You can find many affordable debt consolidation loans right now for that purpose.
Basically, consolidating multiple debts is advantageous because there’s the convenience of making a single payment to one lender instead of two or three payments to different lenders. And, of course, you may also avail of a lower rate of interest.
Steps to Consolidating Your Debts
There are steps that you need to follow to start your debt consolidation journey. Read and take note of them below.
1. Take Account of Your Debts
You can’t just guess the loan amount you have to get to consolidate your debts. So, for you to know the right debt consolidation amount, you have to tally up the total debt you currently owe.
You have to ask your loan providers or credit card issuers for your balances. You can also look for bills that come from borrowing money. Then, add them up to know your current total debt. Since credit can increase quickly due to the interest, you shouldn’t be shocked if your overall balance is higher than you have thought.
2. Identify Bad Debts
Not all debts are to be considered bad debts. The ones that should be under the “bad debt” category are those that have exorbitant interest rates. Home loans and car loans are not bad debts because they are secured loans, which means that they typically have advantageous rates of interest.
Credit cards and payday loans, on the other hand, are commonly high-interest debts. So, they can be put under the bad debt category, and you should consolidate them into one payment with an affordable interest rate.
3. Look for Debt Consolidation Loans
If your total debt is $25,000 with a combined payment of $700 every month, you should look for a debt consolidation loan that will pay the $25,000 off with a monthly payment of less than $700.