Debt consolidation program – 12 Steps to consolidate debt and save $
Do you want to get rid of your debts and save money at the same time? Do you want to attain financial independence and boost savings simultaneously? If so, then debt consolidation programs can help.
What is a debt consolidation program?
A debt consolidation program combines unsecured debts like payday loans, medical bills, and credit cards into a single monthly payment plan at a low-interest rate. Usually, this program is offered by debt consolidation companies. You make a single monthly payment to a debt consolidation company, and they distribute it among your creditors. The process continues until you pay back all your creditors.
Read: Can debt consolidation be useful to you?
How to consolidate debt in 12 simple steps
In a debt consolidation program, you can consolidate debt in 12 simple steps, and those are:
- Check your credit report and note down how many debts you have.
- Calculate how much interest you are paying on your debts using the credit card payoff calculator.
- Calculate how much you have to pay every month.
- Calculate how much you have to pay in total.
- Compute your monthly income and see if you can afford to manage multiple debts.
- If you can’t manage your bills on your own, then look for a reliable debt consolidation company in your area.
- Get a free counseling session with the debt counselors so that you can understand how the debt consolidation process works.
- After you understand how the process works, you can enroll in the program to take a new step toward a debt-free life.
- You have to sign a few documents and give the limited Power of Attorney to the company to initiate the negotiation process.
- After you give all the relevant documents, the company will start calling your creditors to bring a new and affordable repayment plan for you.
- When the company brings a new repayment plan at a low-interest rate, you can start making payments to them every month.
- Once you complete the repayment plan, you can ask your creditors to update your account status as “paid in full” in your credit report.
What are the 3 types of debt consolidation programs?
|Credit card debt consolidation programs||Payday loan debt consolidation programs||Medical debt consolidation programs|
|Here you consolidate your credit card bills into a single monthly payment plan.||Here you consolidate cash advance into an affordable repayment plan.||Here you can merge unpaid hospital bills into a lower monthly payment plan.|
How much can you save with a debt consolidation program?
It depends on various factors like the negotiation skills of the debt counselors, the temperament of creditors, your luck, and the kind of relationship you have with your creditors. However, you can get a brief idea from the following example.
Suppose you have 2 credit cards and 1 store card.
Credit card A – 30% interest rate.
Credit card B – 25% interest rate.
Store card – 15% interest rate.
So, your average interest rate is 23% [(30+25+15)/3].
The consolidation company negotiates with your creditors hard and lowers your interest rates.
The revised interest rate of the credit card A – 15% interest rate.
The revised interest rate of the credit card B – 12% interest rate.
The revised interest rate of the store card – 8% interest
So, your average interest rate is 11% [(15+12+8)/3].
Your net savings is 12% on interest.
What are the advantages and disadvantages of the debt consolidation process?
Like the two sides of a coin, the debt consolidation process has both pros and cons. Let us analyze them to help you understand the plus and minus sides of consolidating debts.
1. It helps to lower the interest rates on debts.
You can reduce the interest rate on your debts through debt consolidation. By putting all debts under one card, you will be able to get a lower rate of interest.
When you are getting help from a debt consolidation company, they will negotiate lower rates of interest with your creditors. Thus, you need to pay a much smaller amount than what you were supposed to pay.
2. It replaces multiple creditors with a single creditor.
When you consolidate your debts, you just need to pay only a single monthly amount in case of a consolidation program.
The debt consolidation company will assess your financial situation and decide on a single monthly payment. You need to pay this amount to the company, and they further distribute this money among your creditors. Thus, you do not have to pay multiple creditors.
3. It gives you a lower monthly payment plan.
If you consider a debt consolidation program, the debt counselor will negotiate with your creditors to lower the interest rate on the debts you owe. This, in turn, helps to lower your monthly installments.
4. It helps you to avoid bankruptcy.
Debt consolidation programs can help you avoid bankruptcy by paying back creditors before they file a lawsuit. It helps you to pay off the full amount at a low interest rate. So, there is no need to worry about filing bankruptcy.
5. It helps to boost your credit score.
Debt consolidation programs do not hurt your credit score. Since you are paying the full amount, it will not hurt your credit score. Rather, if you make regular monthly payments, your credit score will go up.
Nothing is flawless. Debt consolidation has some flaws as well. Here you go:
- In the debt consolidation process, you can’t reduce the total amount of debt. You can reduce your interest rate and monthly payments, but you have to pay off the debt in full, which helps to boost credit score.
- Fraudulent companies have mushroomed in all the places. If you work with them, then you will lose all your money.
If you decide to enroll in a debt consolidation program, then find out if the company is good. Check their rating with the BBB before signing the agreement. A good debt consolidation company provides free debt counseling where you can learn better money management and budgeting skills.
Who offers the best debt consolidation programs near me?
Law-abiding debt consolidation companies with proper accreditation, affordable fee structure, high success rates, and good track records usually offer the best programs.
You can search online for the companies offering consolidation programs near you. Other than that, you can also ask your friends to suggest a few credible consolidation companies in your area. Thereafter, you can shortlist companies that have all the aforementioned traits. Call them one by one and find out how they can help you. Ask them various questions and clarify all your doubts. If they can satisfy all your queries with justified answers, then you can consider working with them.
See also: Multiple debts? 9 Ways to choose a great debt consolidation company
Debt consolidation program vs loan – Which one is a better option?
Debt consolidation programs: It rolls high-interest unsecured debts into an affordable single monthly payment plan. When you sign up for a debt consolidation program, the debt counselors negotiate with your creditors for a payment plan with a low-interest rate. They talk about the financial problems you’re in and request them to cut down the interest rate on your bills.
Debt consolidation loans: It works in a completely different manner. With a debt consolidation loan, you replace your existing debts with a new loan at a low-interest rate. This means you pay off your existing debts with a new loan to save money. The new loan has fresh terms and conditions. So, you may get more time to pay off the debt.
Debt consolidation program vs loan
Now, the main question is, which one is a better option? A debt consolidation program or a loan?
According to many people, a debt consolidation program is better than a debt consolidation loan due to the following reasons:
- Easy eligibility criterion – It’s easy to qualify for a debt consolidation program. All you need to do is submit a few documents and pay the debt consolidation fee. However, in case of a debt consolidation loan, you need a good credit score and assets to be eligible for it.
- No credit check – When you look into debt consolidation for bad credit, a program is a good option for you. There is no credit check in case of a debt consolidation program. However, in the case of a debt consolidation loan, lenders check your credit report and score. They determine the interest rate based on your credit score. If you have poor credit, be prepared to pay a high-interest rate on the debt consolidation loan.
You may lose your assets in case of a secured debt consolidation loan where you have to pledge collateral against it. If you fail to pay off the new loan, then lenders can seize your assets. You can’t do anything.
Is there any alternative to a debt consolidation program?
The decision to eradicate debt is much like the decision to shed those extra pounds from your body. The sooner you get started, the better for you.
Debt consolidation helps you to merge multiple debts into a repayment plan as per your convenience. However, if you have secured debts, then a debt consolidation program is not what you need. It won’t make your financial life easy. In this case, you might need to look at refinancing or bankruptcy as your way out. Let us discuss a few alternative options to a debt consolidation program and find out how they can help to alleviate your financial stress.
Debt consolidation loan – It helps you to get rid of high-interest credit cards with a new loan at a fixed rate of interest. Here, you take out a new loan and pay off your existing debts with it.
The interest rate of a debt consolidation loan is between 6% and 36%. When you have an excellent credit score, you may qualify for a 6% interest rate loan.
However, when you have a poor credit score, lenders will offer you a high-interest loan. Check out the types of debt consolidation loans and the best places to find them in 2020.
Balance transfer method– This is yet another way to consolidate your credit cards, store cards, and other unsecured debts into a single monthly payment at a zero interest rate. What you do here is that you pay all your unsecured debts with a balance transfer card. This is a new card that you get from a bank or a credit card company. The interesting part is that you have to pay 0% interest for the first 12 -18 months. So, this means that if you pay off the entire balance within the first 18 months, then you do not have to pay any interest at all. You can save money, pay off debt fast, and avoid those frantic collection calls.
Debt settlement program– If you want to cut the debt amount into half or more than that, then debt settlement is a good option for you. In this program, the debt negotiators bargain with your creditors for a lower payoff amount due to your financial hardship. They try their best to settle your debt with a lump sum payment to creditors. The only negative side of debt settlement is that it drops your credit score since you’re not paying the full amount. You won’t face this problem in debt consolidation programs because you’re paying the entire amount.
Bankruptcy– This debt relief option helps you to pay off debts under court intervention. The bankruptcy court determines how you will pay off debt and to whom. The court also decides the amount you will pay to creditors after having several discussions with everyone.
There are two types of consumer bankruptcy. The first one is Chapter 7 bankruptcy, and the second one is Chapter 13 bankruptcy. The court will decide the type of bankruptcy you qualify for after doing a means test.