Debt Consolidation: How to Do It and Traps to Avoid

Published April 22nd, 2018 - 08:23 GMT
Instead of falling behind, you should look for an alternative that refinances your debt over the long term. (Shutterstock)
Instead of falling behind, you should look for an alternative that refinances your debt over the long term. (Shutterstock)

Debt consolidation is often associated with emails that land in your spam. But in reality debt consolidation, when offered by a reliable bank or specialised company, is a good financial tool that can help eliminate high-interest debt, and get you back on track financially.

So when should you seek debt consolidation? It could be right for you if you have multiple loans with varying high interest rates and payments — and you feel like you’re not keeping up with the payments for those loans or credit card balances.

Instead of falling behind, you should look for an alternative that refinances your debt over a longer term and gives you one manageable and predictable monthly payment. So instead of having to recalculate your payment based on the added interest and charges every month, you will be able to plan ahead and pay off your debt successfully.

If debt consolidation sounds like the solution for your debt, you still need to do some work to make sure you’re getting the best option because the word is loosely used to cover many options that are not necessarily consolidation. Remembering, your goal is to get into a more manageable situation, so shop around to find out who can help you reach this goal.

Companies out there offer different options and based on your situation, you need to pick the one that is right for you. Here are a few options to keep in mind:

Personal loans

Taking out a personal loan to pay off your debts is one easy way to consolidate your various high-interest debts into one monthly payment. It is more of a do-it-yourself approach, even though banks do lure borrower with debt consolidation as the goal. That is why if you pick this option, you should be willing to do the extra of figuring out how to pay off your debts down to zero — or as close as possible. Otherwise, you are just adding another loan.

The obstacle in getting a personal loan is that you may not qualify for one or it can be costly. If you’re at a stage where you have a lot of debt with various lenders, getting a new loan can be tricky and expensive because you will be perceived a higher risk.

Debt management

Similar to personal loans, debt management can help you roll your various debts into one monthly payment. A debt management consultant can help you plan this process for a fee. You may seek this option if it appears difficult or expensive to get a personal loan or transfer your debt to an interest-free balance transfer credit card.

To get started, make sure what an agency or consultant can offer you. The best way is to seek a free consultation before you commit to working with a debt-management agency. In addition, review the agency’s history, accreditation and record. Many employers offer employee assistance programmes that include free financial consultation. Check if that could be a good option for you to get help figuring out your option.

Debt settlement

Debt settlement companies may be able to negotiate with lenders and creditors on your behalf with the goal of settling your debt at a lower amount.

Debt settlement can be a good option if you think debt consolidation at a lower rate won’t really help you pay off your debt. Remember working with a debt settlement company isn’t free, and there is no guarantee that your creditors will agree to settle. So before you jump into committing to working with an agency, find out what are the potential savings while taking into account the charges and fees that come with the service.

Similar to how you should approach debt-management companies, do your due diligence to ensure that you’re working with a reliable company that can actually help you reduce your debt and reach agreements with your various creditors.

Rania O’teify, a former Gulf News Business Features Editor, is a Seattle-based editor.

Getting out of debt

* Know the various options

* Watch out for scammers

* Be prepared to follow a plan

* Don’t commit before you study

By Rania Oteify

© Al Nisr Publishing LLC 2019. All rights reserved.

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