Are you disciplined?
By condensing your debt into one monthly payment, you will have some zero balances on your credit card account. Even if you have one debt to pay off monthly, are you in a position to overcome the temptation of using the zero-balance credit card?
You will only get out of debt if you take the big step of denying yourself some luxuries and living within your means. Living within your means paying off the expected monthly debt and setting aside some savings before making unnecessary purchases.
Read the fine print
The font is small and boring, and the terms and conditions are unbelievably long! So, do you have to read it? Yes. The only way to know if the terms and fees will change is by reading the fine print, asking questions and speaking to a professional about the implications of the loan. You don't want to pay more later on. This will make the debt consolidation plan more expensive.
Types of debt consolidation loans
Debt consolidation works for both secured and unsecured loans. However, you can get the loan in two main ways – as a personal loan or as a balance transfer. If you are taking a debt consolidation plan to deal with your credit card debts, then you will have to consider taking the loan for high interest credit cards. With the high-interest credit card, you will be in a position to pay off the whole debt within a shorter time.
Credit card balance transfers give you the opportunity to transfer your credit card balances to one low-rate or zero-interest credit card. Unfortunately, the interest rates can rise sharply within a short time. To be safe, inquire about the duration which the low interest rate will be valid for. If you can, pay off every amount owed and get out of debt faster.
Debt consolidation is therefore deemed ideal when the loan gets you out of debt fast and at a slightly cheaper cost.
As you scout for the best debt consolidation loan to pay off your debts, you'll also come across a HELOC or a Cash-out refinance. Since consolidation works for secured debts as well, a HELOC (Home Equity Line of Credit) will give you access to a lower interest consolidation loan.
As you consider HELOCs, credit card balance transfers, and unsecured loans, you'll find that unsecured loans charge the highest interest rates in the market.
Are you willing to risk your home's equity?
The HELOC plan is an affordable debt relief alternative in debt consolidation. However, even when eligible, are you willing to risk using your home for debt consolidation? Before signing up for any debt consolidation plan, ensure that the unsecured debt is worth the risk.
A debt consolidation loan is only ideal if the interest rates offered are favorable. For instance, if your average interest rate on the current five debts is about 16.5 percent, you may consider going for a consolidation loan that charges a lower interest, Say 4 percent out of the average interest rate.
Variability of the interest rate
It is a great thing to get a debt consolidation loan that charges about 5 percent less than your current average. However, if the rates are dependent on the market conditions, then the interest rate may shoot off the graph fast leaving you with an expensive plan.
It is preferable to stick to a current fixed interest debt rather than rushing out for a variable one. In the worst cases, people have had to pay more than their initial monthly payment thanks to this interest rate variability.
When will you repay your entire debt in full?
The good thing with debt consolidation is that it gives you the time lines. You know when you will have cleared your debt and how much you need to part with to repay the debt in full. Unfortunately, this is only possible with a fixed-rate interest rate on the debt consolidation loan. So, is that time fair and favorable?
Total cost and your ability to pay off the loan
You may have to make trade-offs to get out of debt. Are you in a position to do this? What is the total cost of the debt? Avoid debt consolidation loans that are more expensive than the cost of your debt.
Now that you have the figures, take a look at your finances to determine whether you are in a position to pay off the debt. If the consolidation loan is spread over a long period, you may end up having paid more money by the end of the repayment period. Choose a time frame that is reasonable and inexpensive. To get this information, you must research and compare the rates and plans offered by different companies.
Most debt consolidation companies offer consolidation loans and encourage borrowers to pay off as much as they can when they can. These companies do not have prepayment penalties and fees. Opt for such companies.
Are you willing to pay off the debt quickly?
How eager are you to lead a debt-free life? To pay off the loan fast, you need to make a few spending adjustments. You must also refuse to get into more debt. Budgetary adjustments and cutting down spending on trips or nights out will get you out of debt faster.
You know that you can take a debt consolidation loan when you have the ability to pay off the debt and are willing to pay more than you need to. You need to pick the best debt consolidation companies.
As a debt-financing strategy, you should remember that your credit score will determine the interest rates you will be charged.
A debt consolidation plan isn't an option if you lack the resources to repay your debt or if that plan proves to be too expensive.
Isabella Reselling is a debt management consultant and a freelance writer. She writes about all matters debt financing, equity financing and personal finance. Check out her blog to compare debt consolidation companies in the market.