Top 10 debt consolidationtips: Get out of debt fast
I am a firm believer of paying off bad debt. In fact, apart from low interest rate debt,which I define as debt with an interest rate < 5% and having a mortgage, there is no other reason to have debt. The purist would say it is best to pay off all your debt. Some even advocate paying your house in cash or paying off your mortgage early. This remains a subject of debate within the financial community. Consolidation is especially important for large debt, like student loan debt or multiple credit card debts. This is not the time to haggle on how you got into this situation but to help find a way to get out of the financial rut.
The next best thing to getting rid of loan and debt, is loan consolidation. It only comes second to actual paying debt off with cash. Debt consolidation can help you pay off your loan sooner and you could pay less in the total amount of payment. Before consolidation, there are 10 tips to keep in mind and explore to make this a less painful experience and to optimize the process.
First, lets catch everyone up.
Table of Contents
What is debt consolidation?
Debt consolidation is the act of rolling high-interest debts, such as credit card bills or loans, into a single, lower-interest payment. This helps reduce your total debt amount and it is structured in a way to pay the debt off faster.
Refinancing and consolidation has subtle differences but I would be using them interchangeably here for the purpose of this article. Both can help you or sink you depending on how you use them.
Here are the 10 Top tips to consider before when consolidating your debt. These are useful either before you decide on refinancing or if you are denied consolidation loan or refinancing.
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1. Make sure the consolidation strategy helps pay off your debt faster and cheaper
You need to ask yourself this question: why am I consolidating my loan? This is an important piece of the puzzle; if you are not ready to pay off your debt faster, don’t bother with consolidation. Usually the loans require a certain monthly payment and it tends to have a time frame say 5 years to pay it off. This means your monthly payment might actually be higher than what you currently pay, depending on the difference in interest rate. If your loan takes a longer time frame because of consolidation, chances are that you would be paying more total amount than your original loan. Dave Ramsey made an example which I’ll borrow here.
Example
If you have $30,000 debt.
Debt 1: $10,000 at 12%, 2 year loan. Monthly payment = $517
Debt 2: $20,000 at 10%, 4 year loan. Monthly payment = $583.
Total payment = $1100 dollars
After consolidation.
Debt : $30,000 at 9%. Monthly payment = $640
You say to yourself. Sweet! get to pay $460 less in monthly payment?
Here is what people don’t know. It now takes 6 years to pay off your loan. Also now paying$46,080 total on the new loan instead of $40,392 for the original debt
That is some sleight of hand right. How did you end up paying more despite the lower interest rate? That is math for you. The financial company knows more math than you, and they can easily cheat you if you are not diligent.
If this does not apply to you, you might want to consider other alternatives.
2. Be sure you are rolling into a lower interest payment
This is the ideal scenario. There is no point rolling your 10% + 5% interest debts and consolidate into a 10% interest loan. Make sure it makes sense before pulling the trigger. For example, one of my student loan is about 4% interest rate. Most of the consolidation offers that I receive are offering close to the same rate. It was not worth it for me, so I decided not to go ahead with consolidation.
3. Sell some of your assets to clear your debt
I know this is a bit extreme. But is it? There is no reason to have 2 BMWs in your garage while paying credit card debt. You want compound interest to work for you and not against you. So instead of re organizing your debt, a direct way to pay them off is to simply sell some of the possessions you really don’t need. You might have to part with some of your favorite possessions to gain your financial freedom.
You might be surprised how many valuable items you have that do not add value to your life. Who knows, you might be able to pay off all your debts.
If your house is too big, sell it and downsize to a smaller home. The definition of too big is if you have a room in your house that you haven’t used in a month. If so, your house is too big. I didn’t say these steps are going to be easy, but it will get you closer to financial independence.
Why don’t you sell that wedding ring or other sentimental things you have. My take is, if you are drowning, take whatever life boat you can grab. Mrs Breathe Easy Finance was not too excited about that one. Let’s just pray it doesn’t come to that.
4. Don’t just make the minimum payments on debts
This is a very common. People focus on just paying the minimum payments. When I checked my medical school loan to see how long it will take if I just paid the minimum payment, it was something ridiculous like 20 years. Pay more than the minimum payments.
Credit card should not be used for purchase, unless you can pay it back in full before the due date. We make credit card payments immediately and our credit is top notch. Don’t listen to people who say you need to have some balance on your credit card to have an excellent credit score. The amount you owe on credit card and loans, make up about 30% of your credit score.
If you pay more than the minimum payment, you will pay less interest on the long run and pay your debt off faster.
This means you would have to cut down on you spending in other areas, and you might actually pay off your debt faster than you think. Even if you consolidate your debt, it will still require discipline to pay it off.
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5. Consider another mortgage or refinance
I know this is counter-intuitive. Why would you take out a second mortgage you ask. The reason is that, mortgages are usually low interest loans. Even with the rising interest rates, it is still lower than most loans you can find out there. If you are lucky enough to secure a much lower interest rate than your older mortgage, you can actually use the new mortgage to pay off the old one. You can also use the money to pay off debts with higher interest rate. This is another form of consolidation, in a way. Just know that now your house is at risk. I trust you to pay it off in no time.
The strategy might not work if your current mortgage company slaps you with a penalty for paying your mortgage earlier. In that case, consider using your current lender for the second mortgage.
6. Be a credit card tart
There are people called credit card tarts. Stop it! It’s not what you think it is. It is an actual legit word used to describe a practice of transferring balances from one credit card to another to maintain a low interest rate. Credit cards tend to have a low introductory rate on new cards, even down to zero percent for a year or even two years. By transferring a high balance to a new card, it can save you enough time to pay it back. This is advanced financial strategy and you have to be disciplined to utilize this method. It takes finesse and skill to be a tart. The debate of whether to be a tart or not to be a tart is for another day.
This skill is especially good for debts with low balance. So if your credit is still in good shape despite the blunders, you can always apply for more cards with 0% or low interest rate.
Pursue 0% introductory cards only if you can repay all of the debts in the zero percent balance transfer period.
Don’t forget the 2 – 3% balance transfer charge. Also, make sure you burn all those cards after you are done paying them off. Don’t be tempted to reuse them.
7. Negotiate a lower interest rate with your credit card or loan company.
Are you paying a lot of interest on credit cards? Then, we want you to know that you can negotiate the current interest rate. Call them and explain your request. I was actually able to reduce my interest rate on our credit card to about 10% by just calling them up and explaining how we have been an awesome customer and so on. To my amazement, they reduced my interest rates. I never paid the interest, but just in case, I’ll rather have a lower rate.
There you have it. Don’t be afraid of rejections. And you never know if your sweet talk could lower your interest rates. Take action today and pick up your phone.
8. Try an unsecured loan
This is a last resort . If you have no home or valuable property to leverage, consider an unsecured loan. Perhaps you already sold them in #3 above. Strong work!
This might be surprising to some people. Although unsecured loans tend to have not so favorable interest rate, they are still better than credit card rates. You can qualify for 10 percent easily with good credit.
The unsecure loans tend to be shorter term and this forces you to save and pay it off. The monthly payment might be higher, but you will reduce how much you pay in total. Remember the compound interest again, the shorter time frame you pay, the less interest rate.
9. Consider debt settlement
Debt settlement is a way to get your creditors to make a deal with you, in exchange for a single reduced payment on your loan. Let’s say you owe 50,000 dollars, you might be able to negotiate paying 20,000 dollars cash for example. This is an alternative to debt consolidation and it is commonly done by people with poor credit.
From my research, it has the potential of affecting your credit score, but it is still less damaging than bankruptcy.
Usually, the debt settlement is handled by a third-party company. These are called the settlement company. They will negotiate on your behalf with your lending company. They basically tell the lending company, take the 20,000 dollars or never get another dollar. Most of the time, the credit company who have seen delinquencies on your account and missed payment knows when to take a good deal. Some money is better than no money. Also, it takes a lot of effort and energy to continuously harass you to pay up.I have heard of those harassing calls which threatens, scares or outright makes death threats all in the name of collecting debt. A settlement eliminates the companies need to pay debt collectors to retrieve their money.
It is important to note that there is no guarantee that your owing company will take that deal.
10. Try all available options before bankruptcy.
We all dread that word “bankruptcy”. It does not only leave a long lasting effect on our credit history, it also causes emotional distress. Similar to having a criminal history, no matter where you go, it seems to follow you around. Avoid bankruptcy by living below your means, and follow some of the ideas above to get out of debt. If consolidation is right for you, go ahead and get it done. Just remember that debt is mostly caused by irresponsible financial habits. Focus on healthy financial habits.
It is clear that there are many ways to pay your debt faster. You can possibly use one of the above techniques or use a combination. Whatever, you do, just be aware of the downsides to everything.
Paying off debt is the first springboard to financial independence and freedom. It improves your cash flow and help you focus on building wealth.
- Make sure the consolidation strategy helps pay off your debt faster
- Be sure you are rolling into a lower interest payment
- Sell some of your assets to clear your debt
- Don’t just make the minimum payments on debts
- Consider another mortgage or refinance
- Be a credit card tart
- Negotiate a lower interest rate with your credit card or Loan Company.
- Try an unsecured loan
- Consider debt settlement
- Try all available options before bankruptcy
There you go. I understand that many of the options might not be ideal for many, but they are available for you to consider.
Please let me know the ones you disagree with and the ones you agree with. The journey to financial freedom is not easy with debt. Get out of debt fast, at least the bad ones and then start building wealth.
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Thanks for reading.
Adebayo
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I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
