For people struggling with mounds of debt, a debt consolidation program can seem like a wonderful thing. These programs promise to take all of your debts and reduce them down to one convenient monthly payment, leaving you with only one bill to worry about and a seemingly direct path to debt freedom. Sounds great, doesn’t it?
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The problem is that debt consolidation programs can be expensive — sometimes very expensive. That expense is usually wrapped right into the new payment you’re given so that you never directly see the costs, but they’re there. You’ll end up paying a lot more out of your pocket through a debt consolidation program than through handling it yourself.
What about debt consolidation programs that claim to lower your debt? Most of those programs simply negotiate with your lenders on your behalf and come up with payment programs that you could get yourself, simply by contacting the lender, explaining your situation and working out a better payment plan directly with them, cutting out the middle man.
If you’re struggling with several debts and are trying to figure out a plan forward, you are far better off simply spending an afternoon getting your debts in order, contacting your lenders, consolidating some loans, transferring some balances and reducing your payments yourself versus paying a debt consolidation program a boatload to do it for you.
The process is simple.
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First, review the most recent statements for each of the debts you’re worried about. Student loans, credit card bills, medical bills, car payments, all of it. Make sure you have the outstanding balance, interest rate, your monthly payment amount and contact information for the lender, all of which should be on that statement.
Once you’ve done that, find out if you’re eligible for any zero-interest balance transfers. Many credit cards offer the possibility of transferring a balance from another credit card at zero interest, meaning you’ll do away with a lot of credit card interest very quickly. This isn’t a permanent solution, since the zero interest rate usually only lasts for a year or so, but it’s a great way to get some of your highest interest credit card debts out of the way. Your best route for doing this is to sign up for a new card that has a zero interest balance transfer offer. If you are eligible for any offers, you’ll want to transfer your highest interest debts to those new cards.
Then, starting with the highest interest debt you still have, contact each lender and negotiate. Explain that you are in a financially difficult position and that you are trying to lower your monthly payments and interest rates because if you don’t, you are going to have difficulty continuing to pay the loan back. If your situation is precarious enough to consider bankruptcy, don’t hesitate to mention that because, in the case of bankruptcy, creditors who hold unsecured debt will almost always get nothing in the settlement, so they’re happy to negotiate with you. (Bankruptcy has some very negative consequences for your finances, however, so it’s not a magical solution here.)
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If you’re willing to take a hit on your credit report or if your credit is already in recent trouble, don’t hesitate to make an offer on the debt that’s far less than what you owe (say, 15 percent), but do this only if you can immediately pay it off through some other means.
Many lenders will work with you quite easily to come up with a better payment plan; however, many credit card companies will close the credit card as part of this process. Decide in advance if you’re OK with closing that credit card in order to help reduce the debt. Be sure to ask what impact any changes will have on your credit report.
You may also consider consolidating your student loans if you have not done so. Consolidating your student loans can be tricky, but it can be a route for both lowering your interest rates and your payments on your student loans.
Finally, if you have good credit and a partially paid-off mortgage, consider a home-equity loan or a mortgage refinancing. A home-equity loan can be a great way to consolidate several debts at a very low interest rate, with the drawback being that you are using your home as collateral. Once you have taken care of the other steps, consider placing a call to your mortgage lender to discuss refinancing or home equity lending with them.
At the end of this process, you’ll have most of the same results as you would with a debt consolidation program, except that you won’t be paying the costs of a debt consolidation program. Instead, that money stays in your pocket — or, even better, goes toward paying down your debts even faster.
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Why You Should Avoid Debt Consolidation Programs – and What to Do Instead originally appeared on usnews.com
