If you’re struggling under a mountain of debt, don’t be scared. You could get it under control and even become debt-free in a few years via debt consolidation. If you’re not familiar with debt consolidation it’s where you combine all of your debts together into one new payment. When done right, debt consolidation offers two big benefits. First, it means you would be making just one payment instead of the multiple ones you’re now making. And second, that one payment should be much less than the sum of the monthly payments you’ve been making. But before you rush into debt consolidation it’s important to know the dos and don’ts.
Do check into credit counseling
Before you do anything else you should check into consumer credit counseling. There is probably an agency or company near you that offers this service and your first visit should be free. What will happen is that you will sit down with a counselor who will spend at least an hour with you going over all of your finances. He or she will then help you develop a budget and a debt management plan (DMP). Depending on how much you owe, your DMP could have you debt free in anywhere from three to five years. Since this introductory session will probably cost you nothing, it’s a no lose situation. If you like the advice and the plan you’re given, you can continue on with the credit counseling. If not, you could just walk away and try something else.
Don’t be flimflammed
If you decide you would like to try consumer credit counseling, be very careful about the agency or company you choose. There are a number of scam artists out there who will offer to loan you the money to consolidate your debts, take your payments on the loan and then do nothing. The sad part is that it could be three or four months before you realize you’ve been scammed and by then it’s too late to do much. You will not only have lost the money you paid the crook but will now be even further in debt.
Do talk to your bank or credit union about a loan
One of the fastest ways to consolidate debts is by taking out a loan and paying them all off. As noted above this should yield a much lower monthly payment than the sum of the payments you’re now making. Paying off all of your creditors simultaneously would not only stop them from bothering you but would also get rid of any debt collectors who have are harassing you.
Don’t get a secured debt consolidation loan
Secured loans mean loans where you are required to offer up some asset as collateral. In most cases that asset will be your home in the form of a home equity loan or home equity line of credit. There are two problems with these types of loans. First, they put your house at risk. If you were to stop making payments on the loan, your lender could repossess your house and you could find yourself out on the street. Second, these loans usually have a term seven years or longer. In fact, a home equity loan could have a term of 10 to 15 years. In comparison, if you could get an unsecured loan this would not put your house at risk and you should be able to pay it off in five years or fewer.
Do try settling your debts
If you have some basic negotiating skills you could contact your lenders and offer to settle your debts for 50% or 60% less than you owe. If you are at least six months behind on your debt payments, you might find your creditors ready and willing to settle with you. While this is technically not a form of debt consolidation, it is a way to get debts under control and paid off.
Don’t try this unless you have cash available
In addition to being six months behind in your payments, you need to have the money available to pay your settlements. For example, if you were able to settle a $5000 debt for, say, $2500 you would need to have the $2500 in cash available to send to your lender. In fact, offering to pay off the debt with cash is one of the most important reasons why your lenders would be willing to settle with you.
If you don’t have the necessary amount of cash available to settle your debts yourself or if you don’t believe you’d be a good negotiator, then hiring a debt settlement company could be a better option. The best debt settlement companies have debt counselors who are experienced at negotiating with most lenders including the credit card providers. This is a way to consolidate debts because once the company has settled all of them; you would be required to send it only one payment a month. Plus, you should be debt-free in just 36 to 48 months.
Don’t fall for big promises
In the event you decide to hire a debt settlement company, don’t fall for any big, pie-in-the-sky promises and refuse to pay any upfront fees. Honest debt settlement companies do not charge upfront fees. In fact, you would not be charged anything until the company settles all of your debts and presents you with a debt payment plan. In addition, no ethical debt settlement company will promise to loan you money to pay off your debts or that they can help you become debt free in just a few months. There are other red flags to watch out for when choosing a debt settlement company as explained in the following video.