There are a couple of initial steps that should be considered when speaking about the debt consolidation process. Also, you should be acquainted with the debt consolidation process itself. This process can be divided into three phases: the pre-consolidation phase, consolidation phase, and post-consolidation phase. Steps in each phase should be followed and carefully planned if you want to go through a smooth debt consolidation process.
The pre-consolidation phase considers the preparatory activities that should be performed before applying for a debt consolidation loan. Steps involved in this phase are:
Accepting the need to cope with the debt – is a step where you become aware of the need to better manage your debt. Meaning that you are noticing the signals that you are on your way to worsening your financial health or are already in an unfavorable financial situation. By accepting your debt reality, you should also commit to repay the debt.
Debt consolidation – is most probably the first option you will take into account to cope with your debt. But, before making any decision, you should ensure that you understand how debt consolidation works.
Other alternatives – before deciding to take a debt consolidation loan, make sure that you are familiar with the different options you have available to deal with your debt problems. You should always make an informed decision, for that reason, make sure that you know the different debt consolidation alternatives.
Choosing a company – if you have decided that debt consolidation is the most suitable alternative for you, then the next step is to choose a finance company you will work with. Being lazy when searching for a finance company could make you a victim of debt consolidation scams. Not choosing an adequate company could prolong or hinder your debt consolidation process.
Understand the risks involved with debt consolidation – this is especially important if you are taking a secured loan, which means that you should be aware that you are securing your debt with your assets. Consequently, any failure to repay the new loan or a missing couple of payments could result in losing your assets (most often home). Thus, make sure that you are fully aware of the risks and consequences that could come with debt consolidation.
Suppose you have decided to consolidate your debt, then you should know the basic steps involved in the debt consolidation process. Noteworthy mentioning is that these are more or less the general steps in the process, depending on the finance company, there could be some additional steps that should be performed. Thus, it could be said that the consolidation phase is considering the part of the debt consolidation process related to the loan application itself. And all other relevant issues during loan application and approval. Hence, after going through the preparatory phase and deciding on the finance company for your debt consolidation, you should expect to go through the following steps:
Evaluation of current situation – this initial step considers the assessment of your current financial situation in terms of debts and income, as well as your level of assets. Go through your spending during the last couple of months (three months, six months, or even more) to see what you have been spending your money on. Identify any expenses that could be eliminated. Consider your credit cards, an extreme step would be to stop using your credit cards, and by stop using them, you should cut your credit cards. You could keep one credit card to serve you as an emergency fund, which means that this credit card should be used only in an emergency, not for everyday shopping or purchases.
Presenting the solution – after assessing your overall financial situation, you will be presented with the best debt consolidation options suitable for you. Also, you will be presented with the rates, different fees, possible savings, repayment period, and other relevant information. Depending on your situation, you might be asked to find a co-signer on your loan in some circumstances.
Confirmation – this step considers the underwriting of the loan only under the circumstances that all parties show a desire to continue with the debt consolidation process. In general, this process involves the verification of the required information.
Transfer of funds – after all other steps have been completed, what comes next is to transfer the funds. It should be noted here that the funds could be transferred either to your account or transferred directly to your creditors. If funds are transferred to your account, you should use these funds to repay all of your existing debts. Stated differently, you use the funds to pay off all of your creditors and, consequently, debts.
The post-consolidation phase deals with the actions that should be done after the consolidation loan has been approved and creditors have been paid. Because now, the old debt has been repaid, you should not forget that you have a new debt that should be serviced.
Reasons that could obstruct the debt consolidation process
Neglecting credit report –because your credit score plays an important factor in getting a loan, make sure that you know your credit score. Having a good credit score can benefit getting a loan with a lower interest rate. Also, a good credit score can help you to easily get approved for a loan. Always check your credit report to see if it is accurate or some items have been misreported. Moreover, try to take actions that will help you increase your credit score.
Lack of interest in the document signed is another reason that could obstruct your debt consolidation process. Common for most people is that they don’t bother to read the entire agreement and blindly sign any document. Not understanding the terms and conditions could prolong or even stop your debt consolidation process.
Lack of debt consolidation plan – some people carelessly enter the process of debt consolidation, which means that they have not set any consolidation plan or didn’t bother to define a specific plan as to what they want to achieve with the debt consolidation. Even worse is that some people do not understand the process entirely?
Neglecting the importance of a good financial company – not paying attention to the process of selecting a good company for your consolidation process could turn out to be damaging for your financial health. Thus, before starting the debt consolidation process, spend some time wisely choosing a company.
Creating additional debt – if you continue to create debt (for instance, using your credit cards), you could hamper the debt consolidation process. Because you will either have to change the consolidation loan amount, or the benefits from consolidation will vanish.
The complexity of the debt consolidation process depends entirely on your desire to go through the necessary steps. Having a plan set in place will make it easier for you to go through the debt consolidation process.