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Can Debt Consolidation Rescue You Out of a Sticky Financial Situation of Too Much Debt?

Let us picture a hypothetical scenario of a 25-year-old woman called Sue who has a regular job. Sue had taken a student loan while completing her graduation, and that loan still has a couple of years left for complete repayment.

She has also bought a car using a car loan, and also continues to use her credit cards to shop for essentials or occasional luxuries. Apart from all this, she has also had to take out an unsecured personal loan to tide over some urgent financial crises.

All these loans have their own monthly repayment cycles, and Sue is managing the payment dates and amounts and trying to keep afloat using her monthly salary. After taking care of her obligations and monthly loan repayments, she has barely any money left to save.

All the stress and creditor calls are getting to her and taking a toll on her mental health. She just wants her financial freedom back. One option Sue has is to go in for a debt consolidation loan.

How does debt consolidation work?
Before deciding to consolidate her loans, Sue has to figure out how the entire process works. So, she grabs her laptop and looks at different websites to understand which companies offer good debt consolidation loans.

She tries to figure out if debt consolidation will be suitable for her after all. In her case, debt consolidation loan would help her clear all the loans mentioned above by providing one consolidated line of credit, usually at lower rates of interest than all the existing loans.

Typically, the consolidated loan would not be paid to her, but directly to each of those creditors. Sue would only need to repay this consolidated loan, and she would not need to keep track of multiple repayment dates anymore. She would be likely to get a lower rate of interest on this loan as well.

Is debt consolidation the only solution?
A debt consolidation loan sounds like a good way to get out of a never-ending cycle of too much debt. However, is it the only way to avoid managing multiple creditors? Debt consolidation loans are indeed an excellent way to reduce the stress that mounting debt can cause.

However, it can also be easily worked out with a DIY method by Sue herself, by speaking to her lenders directly and taking concrete steps to reduce her loan burden. The problem is that most of us are too scared of all the big numbers, and we prefer to take expert guidance instead, even if that means paying more charges.

However, there are other ways to avoid these headaches, and that is to keep some smart tips in mind while taking loans. Let us a take a look at all the options that Sue or anyone in her situation would find helpful. Too much debt is never a good idea, but even when a loan is necessary, some rules must be followed.

Balance repayment capacity with loan amounts
As per the experts, the rule of thumb is that you need to start by subtracting monthly financial commitments such as household expenses, insurance premium payments, savings, and earlier loan repayments from your monthly income, and see that you still have 50% of it left over. The monthly repayment amounts should then fall within that amount. Taking Sue's example, if she earns $10000 a month, then all her monthly repayments should never exceed $5000, and be less if possible.

Negotiate smaller tenures
A more lengthy tenure on loan looks attractive because the monthly repayment amounts seem less. Sue must keep in mind that if her car loan is of 5 years, then the monthly repayment would be much lesser than if she took a 3-year loan, but over the five year period, she would end up paying more interest than in 3 years. Home loans are even worse because they offer tenures of up to 30 years, which can be a crushing burden to carry for so long.

Avoid late fees
Loans start to pile up when you miss your monthly payments. When that happens, you not only need to pay late fines but you are also charged interest on the due amount till you repay it. Above all, all such delays get recorded on your credit score and pull down your credit rating.

Keep the purpose in mind
If Sue had taken that personal loan for a sudden hospitalization for her father who did not have medical insurance, it would be understandable. However, availing a personal loan to fund a two week trip to Europe would be silly if not downright foolish.

You should also take loans cautiously if you are planning on investing the sum in business. It will only be a profitable scenario if your investment has double the ROI or else you will be in loss after paying off the interest.

A loan needs insurance too
So many of us take loans, but this is something that many of us ignore while negotiating the terms. If something happens to the debtor before the closure of the credit, it is indeed a cause for immense grief for the family, but it also would burden the family with the loan repayments. A simple insurance policy can be taken to cover the loan amount to help avoid this scenario.

Keep shopping around
Debt consolidation is a situation where a single loan can replace all existing loans. However, before Sue goes into this, she should also keep her eyes and ears open for the alternatives. Many companies announce changes in rates, or offer to take over existing loans, and Sue should be on the lookout for such deals.

What do you do if you still have too much debt?
The above tips would have helped Sue before she took all those loans, or even while she was applying for those loans. However, she is now already burdened with all those repayments. In this scenario, a good debt consolidation program is the only way she can decompress her financial stress and live a more comfortable life.

Although debt consolidation does have its own pitfalls, if chosen wisely after consulting the correct experts, it can be an excellent way to reduce the worries multiple loans can bring.
Can Debt Consolidation Rescue You Out of a Sticky Financial Situation of Too Much Debt? Can Debt Consolidation Rescue You Out of a Sticky Financial Situation of Too Much Debt? Reviewed by Dhanur Chauhan on 4:12 PM Rating: 5