Debt consolidation companies often give you a fantastic pitch that promises to help you lower your monthly payments and eliminate debt. All you have to do is work with them, combine all your debt obligations into one low monthly payment, and save tons of money. Is it really that fantastic, or just a fantasy?
Personally, I have heard both sides. On one hand, I have heard of good stories where individuals successfully worked with one of these companies and got their debt problem under control. On the other hand, I have heard of horror stories where individuals placed their trust in these companies, made a couple of payments, and later got late notices from their creditors. The debt consolidation company was a fraud and they got into more trouble because of it. So the question is not only: should you pay a debt consolidation company?, but also how can you find the right company?
Photo by alancleaver 2000 via Flickr
In this article, I am going to outline some steps where you can consolidate debt and get this problem under control on your own.
Before you even try to figure out how to get rid of your debt, you have to get rid of the habits and lifestyle that got you into this mess in the first place. If you habitually spend more than you can afford, you need to fix this first. Learn to manage your expenses and live within your financial means. Otherwise, all your effort will be for naught and you’ll end up even worse.
Now that you have your spending habits under control, it’s time to start working on your debt.
Make a list of your debt obligtions with the creditor’s name, amount owes, interest rate, and type (i.e., secured loan versus unsecured loan).
Since your secured loans are collateralized, you could lose your home, car, or other valuables if you default on these loans. Therefore, these are the most important loans to keep your eyes on. Whatever you ended up doing, your plan must be able to support the monthly payment of these loans.
Next, focus on debt obligations with the highest interest rates. These are usually your credit card balances. You want to get rid of your high interest loans as quickly as possible to save money on interest expenses.
In short, you should have a list grouped by secured versus unsecured status, and sorted by the interest rate.
Many people often overlooked the option of negotiating with credit card companies and other lenders as a way to lower your interest rates and payments. Now call each of your lenders and ask them for a lower interest rate or a different payment term. Some will work with you and some will not. The important thing is to ask and see if you can lower your interest rates and minimize expenses.
You may think it’s crazy to borrow more money at this point, but the important thing to do is to lower your monthly expenses and interest rates as much as possible. Therefore, IF you can borrow money at a much lower interest rate, you should do it and use that money to pay down your higher interest loans. The primary goal is to reduce the number of loans and the overall interest rate.
Here are some alternative funding sources that you can investigate:
With the first three steps, you should be able to eliminate a few higher interest loans and consolidated them into other lower interest loans. Now, it’s time to pay them off in a methodical way. Of course, you have to make the minimum payments on all of your outstanding debt. But what should you do with the extra money? The answer is to use any remaining money to pay down your highest interest debt. If you prefer the original method proposed by Dave Ramsey, you can pay down your lowest balance debt first.
As you eliminate a loan, redirect the amount you normally pay to that loan to the next highest interest loan. This is why the method is called a Debt Snowball. As each debt is eliminated, you can pay the next debt down with more money and keep the momentum going.
If you want to get out of debt, these steps can help you accomplish your goal more quickly and efficiently. Remember the key is to change your spending habits and not go further into debt, otherwise, you debt repayment plan will fail. Once you have your spending under control, the key steps are to (1) list your debt according to the interest rates (2) negotiate better terms, (3) find alternative funding sources to lower your interest rates, and (4) to use Debt Snowball to pay down your debt quickly.
Lastly, you can build on your effort by making more money so that you can put even more money toward debt reduction.