What do you need to accomplish?
Debt consolidation is one of the best ways to reduce your debt, but making the choice about how to consolidate debt should be based on meeting your financial needs. Are you running out of money at the end of the month? Are you looking at 15 years to pay off your debts? Are you juggling so many payments that you miss some? Your first step in choosing the right approach is to determine exactly what you need to accomplish.
Let’s look at five core debt consolidation goals you might want to accomplish by restructuring your debt. No matter what debt consolidation approach you choose, these goals are relevant to you.
Every debt consolidation alternative should be judged against its ability to meet your needs. Keep in mind you can certainly accomplish more than one of these goals, but you might not be able to achieve all of them with every debt consolidation option.
Goal 1: Lower Interest Rates
This should be on everyone’s list. Whether you are suffering under the burden of high credit card rates or have an expensive car loan or bank loan, you should pay close attention to the interest rate that you will be paying on any debt consolidation option. If you’re being charged 19% interest on four credit cards, does it make sense to consolidate them into a high-cost finance company loan at 25%? Probably not, but you can get yourself into this situation if you don’t read the fine print.
Here’s our first red flag: Don’t forget to include application fees and processing fees into the calculation. When you sign on the dotted line, make sure you are paying a lower rate “all in,” than you were before you consolidated your debt.
Goal 2: One Single Payment
Having to make one payment toward all of your debts is one of the most appealing features of almost any consolidation option. You’re probably creating your own personal accounting nightmare if you are making the minimum payment on one credit card with cash advances from another. The end result can often be missed payments, even if you have the cash flow to keep afloat.
Goal 3: Lower Monthly Payments
If you are struggling to make ends meet, one of your goals might be to reduce how much you have to pay each month. There are two ways to accomplish this goal through debt consolidation:
- Lower the interest rate charged on the debt you owe –– and / or
- Extend the term of your loan so that you take longer to pay off your debt.
Goal 4: Debt Settlement
Any option you choose should lead to your debt being eliminated within a reasonable period of time. If your situation is so severe that you are looking at years of debt repayment, you need to do more than simply refinance your current debts. Instead, you should be considering debt relief options. This might take many different forms, including simple interest relief through a debt management plan or some form of principle reduction with a consumer proposal, two alternatives we will discuss in later chapters.
Goal 5: Creditor Protection
If all else fails and you’ve missed so many payments that your creditors are calling you at home or you’re facing the specter of your wages being garnished, creditor protection is an option. We will talk more about how a consumer proposal can provide you with legal protection from your creditors and help you protect your assets in a later chapter.
The remainder of this book will explain different debt consolidation options and analyze them against these five goals or objectives. We’ll explain each option and let you know about things you should be aware of along the way.