Cheapest Way To Consolidate Debt
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Cheapest Way To Consolidate Debt

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Cheapest Way To Consolidate Debt – What Is Debt Consolidation?

Debt consolidation can be achieved using different methods, but it is important to find the cheapest way to consolidate debt for your own particular circumstances. The consolidation part really refers to the end result of the process, which is that instead of lots of different debts you have only one payment to find each month. There are two main routes to doing this, both of which I will explain in more detail in this article.

An important thing to understand is that debt consolidation to some people means taking out a loan to pay off all your old debts, and just repaying the new loan. The other system used to consolidate debt is through a debt management plan, or payment plan. This does not involve any new borrowing and generally tends to be the cheapest way to consolidate debt in most circumstances. I will look at what is involved in both options so that you can judge for yourself.

Cheapest Way To Consolidate Debt - Using A Consolidation Loan

Debt consolidation loans can be made to look very attractive at first glance. The aspects that the loan company will draw to your attention are that you pay less money each month and you only have one payment to think about. This is true, but you need to look carefully at what you are going to be paying back over the term of the loan. The usual reason that your monthly payments go down is because the loan is over a much longer period than most of your existing debts. The fact that you will be paying off your debts for much longer can often mean that by the end of the consolidation loan your debts have cost you far more than your original debts would have.

This does not need to be the case if you use a consolidation loan for the right circumstances. Using a loan to consolidate debt is only ever likely to work well if your debts are relatively small. The cheapest way to consolidate debt using a loan is to only do it when your existing debts are at quite high rates of interest and you can get a loan which will be at a lower rate of interest. This is perfectly possible to do as interest rates change over time and it could be cheaper to take out a new loan at a lower rate. So unless you have relatively small debts at relatively high interest rates, you should probably steer clear of a loan.

If you do decide to use a loan, the key to making sure your costs really will go down is to only consolidate those debts that are at a higher rate of interest than the new loan. The loan company may well encourage you to include all your debts, but you should not do this. An easy way to see what you ought to include is to list all your debts out in order of how high the interest rate is, with the highest at the top, then draw a line across at the level of the new loan interest rate. Only include in the loan those debts that are above this line.

Cheapest Way To Consolidate Debt – Debt Management Plans

Borrowing more money when you are already in debt is a risky business and rarely the right answer. A more common and sensible approach is to use a debt management plan. These are widely available in both the US and the UK. They are provided by debt management companies and they also result in you making a single affordable payment to the debt company, instead of to all your creditors.

The way this works is that the debt company will approach all the companies you owe money to and negotiate with them to change the terms for repaying the money you owe. The aim of this is to reduce interest rates and other charges so that they can agree a repayment that is smaller and more affordable for you. They then deal with all your creditors and pay them direct, while you just make one fixed monthly payment to them.

One of the advantages of using a good debt management company is that some of them also offer debt counselling and advice to help ensure that you avoid getting into debt in the future. As well as knowing exactly when you will be debt free again, it is also a great relief to many people not to have your creditors constantly chasing you for repayment. Being in a debt management plan makes it clear to the people you owe money to that you are serious about paying them back. Unlike debt settlement, when you use a debt management plan you do eventually repay your debts in full.

Not all debt situations are suitable for a debt management plan. You need to have a relatively high amount of debt to a few different creditors. These debts need to be of the type that is called unsecured, which includes things like credit and store cards, personal loans, bank overdrafts, etc. You cannot include secured debts such as mortgages.

Cheapest Way To Consolidate Debt –
Finding The Best Debt Management Companies To Help You

One of the keys to finding the cheapest way to consolidate debt is to find a reputable and effective debt management company. Using the wrong company can cost you dearly, because there are companies that will charge you far more than necessary in order to boost their profits. You can easily avoid being over charged by comparing the offers of several different companies before deciding who to go with. It is very easy to apply for help online without any obligation, and then compare the proposals of two or three organisations.

There is a list of reputable debt management companies for the US and the UK on my main debt management page. These are all well established and reliable so you can apply without worrying about taken advantage of.

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