People who find themselves overwhelmed by their debts generally want one thing and one thing only – to get rid of them. Problems with debt can literally take over your life. They can cause you to miss sleep, develop stomach problems or even end up divorced.
7 ways to manage debt
Admitting you can’t manage your debts is the first step in getting them under control. A second important step is to choose a way to manage them. There are a number of options available for debt management, including.
• Debt consolidation loan
• Credit counseling
• Debt Settlement
• Balance Transfer
• Earning more money
• Living frugally
Why debt consolidation is the most popular
Debt consolidation is by far the most popular way to get debt under control because there are three ways to do it – a debt consolidation loan, debt settlement and credit counseling. However, for most people, debt consolidation means borrowing money to pay off their debts. But before you rush out to get a debt consolidation loan, it’s important to know these four myths.
Myth #1: Debt consolidation is the same as debt settlement
Many people believe that debt consolidation equals debt settlement. However, they are two different solutions. As noted above, debt consolidation typically means borrowing money at a low interest rate and using it to pay off debts. On the other the hand, debt settlement means paying back creditors for less than you owe. Another important difference is that a using a debt consolidation loan to pay off debts won’t have an adverse effect on your credit score while debt settlement will.
Myth #2: Debt consolidation will save you money
Debt consolidation will likely save you money in terms of your monthly payment but not in the amount of debt you owe. The reason for this is that none of your bills will be forgiven. If you owed a total of $25,000 and borrowed enough money to pay if off, you’d still owe $25,000. You would likely have a lower monthly payment because you’d have a better interest rate. But you’d probably pay more interest over the life of the loan because it would have a longer term – or more years to pay back the money. For example, you might have credit card debt you could pay back in three years if you really worked at it. In comparison, if you were to get a homeowner’s equity line of credit to pay off those debts, its term or the amount of time you’d have to pay back the money could be five or even seven years.
Myth #3: Debt consolidation is always a better option than filing for bankruptcy
Many experts say that it’s always better to do debt consolidation than to file for bankruptcy. But this is also a myth. If you need to borrow a really huge amount of money, you should first sit down and determine whether or not you will be able to handle the monthly payments the loan will require. If you don’t feel you will be able to do this then bankruptcy might be a better option. A chapter 7 bankruptcy, which is by far the most popular, can get all or most of your unsecured debts discharged. A bankruptcy will stay on your credit report for either seven or 10 years (depending on the credit bureau) and will probably drop your credit score by as many as 200 points. But if you’re totally submerged in debt, a bankruptcy would give you a “fresh start” and might be worth the damage it would cause to your credit.
Myth #4: Debt consolidation will delay getting out of debt This actually may or may not be a myth depending on several factors. As we wrote in an earlier paragraph, if you were to get a homeowner’s equity line of credit or refinance your mortgage to pay off your debts, this would assuredly delay getting out of debt. However, if you were to get another type of loan such as a personal loan with a low interest rate, you might be able to use the money this saves you to heavy up on your payments and get out of debt in less than five years.
Do the math
The important thing is to do the math before you decide to consolidate your debts with a loan. This will make sense only if you would have a lower interest rate, a lower monthly payment and if the loan would cost you less in total than if you were to just buckle down and pay off your debts You need to keep in mind the old maxim that you can’t borrow you way out of debt, which is what a debt consolidation loan amounts to. There are better alternatives available such as debt settlement, credit counseling or finding ways to increase your income that could help you become debt free and without having to borrow more money that you would just have to be pay back. For example, here’s a short video about using debt settlement to eliminate credit card debts.