Debt consolidation is one of the most popular, widely used debt reduction strategies. As the name suggests, it involves combining all your existing debt under one consolidation loan. Ideally, your new plan should have better repayment terms.
If executed properly, consolidating your debt can help clear your loans fast and save money in the long run. Debt consolidation is ideal for those who already have good cash flow, a fair credit history, and only want to combine their current loan accounts to remove unnecessary interest payments.
Unfortunately, debt consolidation doesn’t work in all cases. The strategy involves taking out a new loan, so if you have a poor credit history or your monthly income cannot support new loan payments, you might not qualify for a debt consolidation loan.
For example, reports show that the average American carries around $90,000 worth of debt. Let’s assume you’re paying off the same amount. If the monthly payments only consume a small portion of your income and you just want to decrease the number of creditors you owe money to, debt consolidation might work for you.
However, those who can no longer pay off their monthly dues should consider alternatives such as debt settlement. Focus your efforts toward reducing your principal debt rather than restructuring your loan accounts.
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Debt doesn’t go away. So strive to manage and organize your loan accounts to ensure the monthly payments match your income, household needs, and lifestyle.
Debtors should follow the 28/36 rule. The idea is to keep your household needs and debt service dues below 28% and 36% of your income, respectively.
That means your mortgage, taxes, utility bills, and grocery expenses cannot exceed 28% of your income. Meanwhile, credit card dues, personal loans, and car loans shouldn’t amount to more than 38% of what you make.
Financial institutions offer multiple debt reduction strategies to choose from. Don’t limit yourself to one or two solutions.
Remember: A one-size-fits-all debt reduction plan does not exist. You need to identify which strategies suit your lifestyle, see if you qualify for them, then customize the programs to suit your individual needs.
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