Sunday, March 8, 2009

DEBT CONSOLIDATION - HOW TO GO ABOUT IT?

Friends, in these recessionary times everyone wants to stay light on debt. Hence people are staying away from borrowing money now and avoiding debt. But for those of us who already have debt on our head and want to get light on this account need to get their debt consolidated.

Debt Consolidation is a process where the company will consolidate the customers all unsecured loans into another unsecured or secured loan to offer the benefit of lower interest rate , lower EMI etc to the customer. Simply put its a process of taking a new loan of lower interest rate and foreclosing all your current high interest loan ,thereby paying only 1 EMI at a time.

There are quite a few ways wherein a person can consolidate his/her debt. They are:

1. Taking DC loan

First and the most obvious one is to take a Debt Consolidation loan from a company which will foreclose all your high interest loans like credit cards dues , personal loans etc and offer you a new loan at a lower rate of interest. This will help you save money due to the lower rate of interest charged. Also you will be required to pay only 1 EMI against multiple EMI you were paying earlier. Find out the best company in your area before taking DC loan.

2. Pay Off your Credit Card Loans

If you are one among those who have the habit of having huge credit card outstanding regularly and revolve it, then first thing that you need to do is to prioritise the payment of your credit card debts . Nothing is more important than paying off your credit card bills as the dues on credit card attracts atrocious rate of interest. Lot of people I know would have high credit card balances and also decent money parked in their savings account. This is blatant error one does due to fact of knowledge , I presume. Savings account will give you at best 5% returns while on your credit card debt you end up paying anywhere between 35-40% p.a. Just imagine the difference. So wise thing would be to remove money out of savings account and clear off your credit card balance now.

3.Explore Partial Prepayment Option

If you have loans where the outstanding is large and you can not pay off the entire thing at one go,then try exploring partial prepayment option. Most of the banks offer the option of partial prepayment of your loans. This will help reduce the principal outstanding on your loan thereby reducing the resultant interest charged to you. So great way of bringing down your debt/liabilities.

4. Taking good Balance Transfer Option

Another great option to bring down ones debt is to go for good balance transfer options in the market. This works very well for credit cards but for loans like Housing loan etc also it works very well since due to competition,companies keep offering to take your loan at introductory interest rate which may be lower than the one you are currently paying. for credit card , lot of companies do BT for 0% for a fixed period. It works well if you are looking for lower debt in near future and intend to pay off everything little later.

5. Switching to another company with better rate

Another option worth looking is to look at companies offering you the same product at much lower rate and switch to them . for instance, if you have a housing loan from say Company A at 12% for 20 years and then due to market forces if you see that Company B is offering HL at 10% for 20 years, then it makes sense to switch to Company B by foreclosing the loan at Company A. Company A might charge you foreclosure fee so do your maths and switch.

6. Don't get back to old ways

Last but not the least , is the fact that once you do manage to bring your debt in control avoid the temptation of going back to your old ways of extravagance. Stay disciplined and keep your debt in control through financial discipline.


Stay Wise n Stay Wealthy...

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