Do you feel like you’ll never be able to pay off your debts? As new bills arrive each month, do you sink deeper into debt rather than rise above it? Have you trimmed expenses as much as you can, yet you still find yourself unable to pay for basic expenditures like rent? Do you sometimes skip or only make minimal payments on your debt? Is your financial situation negatively impacting your relationships or are you hiding it from loved ones?
If you answered “yes” to any of these questions, you likely have what is considered unmanageable debt. Another qualifier is if you have a debt-to-income ratio that exceeds 36 percent, making it all that more difficult for you to access loans at reasonable interest rates, which only increases your risk levels.
So what should you do if you have unmanageable debt? One option is to take advantage of the various types of debt consolidation programs, which can make the task of paying bills easier. This is because they can group debts together into one larger debt and/or one with a single payment that can be lower than the sum of all the individual debts and ideally with a lower overall interest rate.
What follows is an overview of some of the debt consolidation options that can buy you some financial breathing room.
One way to manage credit card debt and make it easier to simplify the payment process is to move balances from card programs that have high interest rates to a new card with a lower interest rate. In some cases, there may be initial periods where zero interest is charged. This type of program isn’t for everyone because if you don’t have good credit and a history of making timely payments, you won’t qualify. But if you do qualify, you can enjoy the benefit of having just one card to track and pay each month.
Home Equity Loans
If you own your home, a home equity loan is one way to take advantage of an increased value in your house (i.e., your house is worth more than the balance you owe on your mortgage). That excess money then becomes the funds you use to acquire a loan that you could use, in turn, to pay off multiple, smaller debts. The interest rate you get on a home equity loan may be lower than the rate you would get on a new credit card if used for similar debt repayment strategies. If you follow this strategy, make sure you can comfortably make the higher payment, because unlike unsecured debt, secured debt is tied to an asset that you can lose if you don’t keep up with the payment, which in this case is your house!
Debt Management Plans
This option does not involve taking on a new loan as with the previous two options. Instead, a debt management plan consolidates unsecured debt into a single monthly payment that you send to a debt relief provider. That provider then distributes the designated funds to your creditors. The debt relief provider works directly with your creditors to secure benefits that help you fulfill your obligations over time (e.g., interest rate reductions, stopped late fees, and reduced monthly payments).
One such type of plan is called IVA. IVA-Advice.co is one such company that offers IVAs. An IVA is a way of managing your debts through a legally binding repayment agreement. Because the IVA is supported by legislation, a qualified Insolvency Professional is needed to run the negotiations, especially if there are any court proceedings to deal with, and make sure you and your creditors interests are fully represented to one another. Part of your agreement will be to pay your creditors only what you can afford once all of your living expenses are covered and the rest will be written off at the end of the IVA term.
There is no direct link between IVA and property that you own. But if you are a homeowner, you may be asked to release a proportion of any equity within it through re-mortgaging within the five years of your IVA. If you are in negative equity, your IP may wait until the end of the IVA to assess its value to give it a chance to increase.
If you have student loans, there aren’t always financial incentives to consolidate due to the fixed nature of some interest rates. However, perhaps you’ll be more organized and likely to make timely payments if, for example, your five students loans are consolidated into one program. You can also ask your loan provider about consolidation programs that extend repayment terms and enable you to make a reduced payment each month. While the overall interest amount paid over the life of the new loan increases this way, maybe that consequence is worth it if it means you will make consistent payments. Or, depending on the type of loans you have, you might be able to reduce your interest rate by consolidating your multiple loans and getting one new loan with a new provider. If you want more information on educational loan consolidation, go to the Federal Student Aid website from the Office of the U.S. Department of Education.
Tips for Success
Just remember that before you decide to dive into any debt consolidation option, you need to gather as much information in advance to determine if consolidation is right for you. For example, MSN’s Money website features a free calculator that can provide some insight into how much you can save based on the annual percentage rate and term of a new, consolidated loan based on information you provide about your current debts.
In addition, remember that a consolidation program has to be balanced with a change in your spending habits and lifestyle. Otherwise, consolidation will just be a temporary fix to your bigger financial condition.