Debt consolidation isn't always the best move.
Summary: If you can't seem to make any progress on paying off your debt, debt consolidation might be the answer. Find out how debt consolidation works and if it's the right fit for you.
Despite Oregon featuring a growing economy, many residents struggle with debt. The average resident has $2,943 in personal debt, not including home mortgage and car loans. This goes some way to explaining the higher delinquency and default rates in Oregon than in other parts of the country, with 9,008 residents declaring bankruptcy every year.
Before declaring bankruptcy, you need to consider other options, including debt consolidation. Many debt consolidation firms have been set up to help residents regain financial control. Keep reading to learn how it works.
Debt Consolidation Can Reduce Your Financial Obligations
Debt consolidation is a debt management tool that allows a debtor to combine credit card debt and personal loans into a single loan with a lower interest rate. The idea is to enable the debtor to make a single monthly payment instead of multiple payments for a period of five to ten years. Debt consolidation in Oregon is ideal when:
- Your total debt, excluding mortgage, doesnt exceed 40% of your gross income.
- Your cash inflow is consistent and channeled towards paying the debt.
- You have a good credit score to secure a low-interest debt consolidation loan.
Technically, its impossible to combine loans and merge them into a single payment. The loans have various providers and contractual terms. Debt consolidation requires the debtor to take out a new, larger loan to repay the smaller loans.
Debt consolidation plans are designed to pay unsecured debt, including credit card debt, credit lines, and personal loans. Other types of unsecured loans, including renovation loans, education loans, and business credit arent eligible.
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How to Consolidate Debt in Oregon
1. Analyze and Categorize Your Debts
The first step is to understand how much you owe and your credit score to determine whether debt consolidation is the right option for you. A low credit score and high debt amount may disqualify you from a low-interest loan.
Next, categorize the debt into secured and unsecured debt. Secured debt comprises car loans and mortgages, while unsecured debt includes medical bills, credit cards, student loans, and
personal loans. When analyzing your debts take note of their interest rates and the monthly payments made. The figures will come in handy when planning your budget.
2. Determine Your Monthly Income
Debt consolidation works best for people with a regular income. Commission-based incomes make it difficult to determine the monthly payments that can be made to pay debts. You will want to use an average payslip that doesn't include overtime or paid-time-off to avoid making an unreasonable payment plan.
Also, include your spouses income if youre both responsible for paying the credit card debt and avoid adding alimony or child support payments because these funds aren't always reliable. Residents relying on Social Security Income should only consider alternative debt management options.
3. Create a Realistic Budget
Your bank statements should help you calculate your monthly expenses. Some expenses like rent, car loans, and insurance hardly change, making it easy to trace them and allocate a fixed payment.
Use the statements to identify overspending; if you can reduce the amount spent on these expenses, you can pay off debt faster. Total up all the monthly payments and subtract the amount from your income to determine your disposable income.
4. Calculate the Amount of Debt
If paying credit card debt, calculate the total amount of debt and divide it by the number of months you want to repay the loan over. If youre planning to repay the debt in five years, divide the total debt by 60 months and compare the result to your disposable income.
If you still have cash left over, debt consolidation is your best bet at paying off debt. Be sure to calculate your credit utilization score (total debt amount/credit limit), too, if youre taking out a debt consolidation loan. A credit utilization ratio of less than 30 helps to secure a low-interest loan.
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Analyze Your Debt Consolidation Options
Banks and other financial institutions offer different debt consolidation options. They include:
- Home Equity Loans: This option is ideal for debtors with adequate home equity. They can refinance the mortgage or take out another home equity loan. The second loan has lower monthly payments.
- Personal Loans: This is an unsecured loan that requires equal monthly payments. The loan amounts vary based on your credit score but can go up to $50,000. Since a personal loan is unsecured, its an excellent option for consolidating debt if you can get a lower interest rate.
- Credit Card Balance Transfers: Debtors with a good credit score may qualify for a balance transfer to one or more credit cards with a lower interest rate. You will need a card with a high limit to accommodate other credit card debts, and the annual percentage rate should be low.
- Lines of Credit: If you have a good credit score, your bank or credit union may approve you for a line of credit. This type of credit can be secured or unsecured. The downside of using this option is that the monthly payments are higher than usual, and it takes a long time to repay.
- Debt Consolidation Loans from Credit Unions or Banks: If you have a good credit score and collateral, this is a viable option. The interest rate may be slightly lower than that of a line of credit.
- Debt Consolidation Loans Through Finance Companies: The lending criteria are not as strict as that of a bank, but the interest rate can be as high as 47%. This means youll repay the loan over a longer time period.
- Savings or Retirement Accounts: These two options are great debt consolidation options, but it can be challenging to recover the money. You also risk leaving yourself without an emergency fund or a retirement savings plan.
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Tips to Ensure Timely Payments and Avoid Fees
You will want to avoid certain pitfalls that could extend the loan payment period or attract additional fees. Here are some tips:
- Avoid setting similar dates for paying the debt consolidation loans and other significant expenses.
- Use budgeting apps to track your habits.
- Try to save some money as you pay the debt.
- Pay more than the minimum amount to improve your credit score.
When applying for a debt consolidation loan, be sure to look for a trustworthy lender. Some lenders in Oregon use aggressive sales tactics, duping debtors into applying for high-interest loans that take a long time to repay. Undertake adequate research before applying for the loan. If in doubt, consult a credit counseling agency or look for reputable organizations accredited by the Better Business Bureau.
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