 |
|
 |
| Debt Handling - Debt Consolidation – Pros and Cons |
| Many people find that over time they have accumulated more debt than they can repay. When that happens, there is a reinforcing downward spiral. The inability to repay the debt leads to additional interest charges and penalties, making it still harder to repay the amount owed. |
|
One common suggestion for breaking this vicious circle is to employ debt consolidation. For thousands, this has seemed like the way out, the way back to financial health. But there are pros and cons to debt consolidation, no matter what form it takes. Being aware of those will help you decide if it is the salvation in your particular circumstances.
First, what is 'debt consolidation'? At base, it's a simple proposition. Gather all your multiple sources of debt into one debt and make a single payment every month to a single debtor.
But for that to be helpful several things have to take place at once. After all, whether you pay $150 + $50 + $25 to three debtors or $225 to another it's the same amount. With online bill payment it isn't even necessary these days to make out three checks. You aren't even saving on postage stamps!
In order for debt consolidation to be useful one or more of the following has to occur: (1) either the total monthly payment has to decrease , or, (2) the net amount of interest has to decrease, or, (3) the actual total debt has to go down as a result of consolidation. Which, if any, of these take place depends on the specific debt consolidation plan you have planned.
In the ideal case, which rarely happens, all three take place. The most common scenario is that the monthly payment is lowered. This has several advantages to the debt ridden. When the payment is lowered, you have a much higher chance of being able to pay it consistently.
That helps prevent piling more debt (interest and late charges) onto existing debt. You also have a much more relaxed frame of mind, knowing you can meet the monthly debt obligation without sacrificing other needed items.
|
|
| |
 |
| Debt Handling - How To Handle Debt |
|
The first step to handling any problem, and excessive debt is no exception, is to focus on facts. Here, that means finding out how much you actually owe and what the monthly payments and interest costs. |
|
It's surprising, though maybe it shouldn't be, how many people that are troubled by debt problems, don't actually know how much monthly interest they're paying. Part of the problem may be that they really don't want to know. Considering how much it sometimes is, one can hardly blame them.
But the first step back to financial health is a good diagnosis. If you're paying $200 per month in interest charges alone on a monthly net income, say, of $4,000, then you are paying 5% PER MONTH of your income for essentially nothing. It's not entirely nothing, since you are enjoying the things you bought early. You would have had to save to purchase them outright. But is that worth 5% of your income?
When that $200 a month (and for many, it's much more) becomes the total you can pay each month, you have reached a point where you will never pay off the debt. If all the money is going to interest none is going to principal. That may be an extreme case, but consider how much of the monthly payment in your circumstances goes for interest versus repayment of principal.
Suppose it's 90% interest, 10% principal. That's approximately the case for the average home loan for the first several years. You can use an online calculator to see how long that will take in your situation.
Suppose, for example, you owe $10,000 at 7%. You could pay only $116 per month, but it would take you 10 years to pay it off. The interest would cost you $3,933 - almost 40% of the total amount.
Now that you've seen your situation, you need to take two further steps. Develop a budget that will allow you to make payments as large as you can handle to get the bills paid off. You could use the 'snowball method' and pay off the smallest one first. Then apply what you were paying to the smallest to the next smallest (now the smallest), until you've reached the end.
Alternatively you could pay down the largest bill. That would save you the most in interest charges, but it's hard for many people to stick to it, when they see such slow progress.
Now, for the hardest - and most important - step (which should be carried out simultaneously with the first): stop borrowing. You should not allow yourself to incur any further debt until you have paid the first down to a reasonable level. That level is zero for credit card junkies. For others, it may be in the 5% range. For some with good willpower and are willing to eat the overhead, 20% is the maximum.
Facing reality and making a commitment to long-term change are the two hardest things for anyone who has entered financially turbulent waters to do. But they are the bare minimum required, if you want to recover your financial health and independence.
|
|
|
|
|
|
 |
| Know more about card debt negotiation and settlement |
A majority of the people out there have at least one credit card. According to them, it is quite easy to do all their purchasing by credit card because after all the bills are going to be paid 45 days down the line. One has to remember one thing. The banker is definitely not your friend. He is there to make money, and he has done it by selling you a credit card. He managed to persuade you that you are going to really use this credit card to your advantage, because it is very easy to track the expenses when you use a credit card. But what happens? You find yourself in a credit card debt and begin to think of ways and methods in which you can look for a card debt negotiation. In fact, you are going to find yourself in this position only under such circumstances like losing your job and finding that your source of income has been completely depleted. That is when a card debt negotiation is naturally called for.
The reason why people get into a credit card debt settlement is that they have the means to pay just a 10% bare minimum payment required to keep their credit card active. What they do not look at is that the minimum amount is deducted from the credit card total, and a month later one get the rest of the amount with the interest tagged on, along with polite threats of pay up or else. That means there is no chance of paying the principal amount when you have all this interest tagged on. Now you have only a number of options left before you. You can either do the transfer of your balance at a really low interest rate, or you can get what is known as card debt settlement loans.
A debt consolidation loan means that you can do a consolidation debt settlement, by taking a loan for settling your credit card debts. This naturally happens to be quite ironic, because you are taking on another debt to settle your debts. Credit cards happen to be unsecured and low risk debts. So when you think about doing a consolidation debt settlement by taking out a debt consolidation loan, it means that you are going to take out a secured loan which is very high-risk financial transaction. |
| |
| Debt Handling - Debt Reduction - Snowball Method |
There are multiple ways to reduce your total (and monthly) debt load, some less painful than others.
The obvious one, of course, is to simply pay down your debts. That can be difficult, and for some it may seem hopeless. But there is one method that has been employed by many with great success: the snowball method (so named by Dave Ramsey).
The technique is, in essence, very simple. Order your debts from lowest to highest. Pay the minimum required on all monthly debts, then allocate any remaining funds you can to paying off the smallest debt. Thus, the smallest debt will get paid off first. This frees up yet more money to apply to the next-smallest (now the smallest) debt. Repeat until you have reached the level you want.
This method has several advantages. You see regular, visible progress in reducing your debts and in a relatively short period of time you could well be down to a livable level. As you roll-off those debts, you have more free income which can be split between payments on the debt next in line and the enjoyment of some rewards.
Psychologically, this helps keep the debtor motivated to continue the program. Seeing real progress helps one stick with it during a financially challenging period.
But, for all its virtues, the method does have one real drawback. It actually requires more time (and money) overall to pay off all your debts that way. The reasons have to do with how interest compounds.
If you pay off a $1,000 debt, a $2,000 debt and a $10,000 debt they may all have the same rate of interest. But paying off the lowest amount first actually costs you more in total interest paid. Since any outstanding amount is charged at the same rate of interest, the higher amount will incur the largest charge. As a result, over time, you will pay more in total interest charges.
Reversing the order, paying the highest amount first, actually saves you money in the long run. As you pay down the highest debt first, you are reducing the amount of interest dollars paid over time.
The difficulty is that the latter method, though more cost effective in the long run, is harder for most people to stick to. It takes a lot of discipline to live with that debt burden as you slowly reduce the $10,000 debt.
At most interest rates, the lower debts will actually get paid off first. But in the meantime you are making high monthly payments. That takes a lot of willpower every month.
That willpower is the one thing that a lot of people too deep in debt find hardest to generate. It's the factor, often, that led to excessive debt in the first place.
For such people, using the snowball method may well be an advantage, despite the larger total amount paid out over the life off all the debts combined.
|
|
|
|
|
