First of all, you need to decide if debt consolidation is right for you. If you have more than two credit cards with high balances, are more than a month or two behind on any debt payment, or regularly bounce checks, you should consolidate debt to help improve your financial picture.
The following are the 3A (Acknowledge. Analyze. Act) steps that recommended by AKPK:
1. Acknowledge that you have unmanageable debts. Do not be in denial. Stop incurring any new debts.
2. Analyze your situation to assess your financial standing.
- Organize your loan statement to gauge exactly how much you owe.
- Compare your total debt repayments to your income
- Prioritize the repayments of your debts. Pay off overdue loans and debts with higher interest rates first
3. Act by taking immediate corrective actions.
- Develop a budget to include monthly loan repayments.
- Use your saving or liquidating investment assets to reduce your debt
- Reduce your expenses
- Find ways to increase your income, through a part-time job
- Renegotiate the terms of your loans with your financial institutions and work out a repayment plan to suit your cash flow
- Seek the help of the Credit Counseling and Debt Management Agency (Agensi Kaunseling dan Pengurusan Kredit or AKPK) at www.akpk.org.my if your financiers are unable to assist you.
Is debt consolidation something that one needs to do it him/herself?
The best and easiest way to consolidate debt is to get a debt consolidation loan. This loan will pay off all of your existing debt, and you can often negotiate a discount with your creditors. After the debt is paid, you’ll pay back the loan, exchanging your many different high interest payments for one low interest one. You can get a debt consolidation loan through your bank, through a debt specialist company, or through your mortgage company. Depending on where you get the loan, it may be secured with collateral or unsecured.
Is it worth paying someone else to do what you can do on your own, i.e. negotiate lower interest rates and stretch out your repayment schedule and pay off the highest-interest debts first?
When consolidating your debts, what are some of the main considerations? (e.g. look at debts that are charging high borrowing rates…)
There are many variables involved, and differing types of debt consolidation:
– Consolidating unsecured debts – If you have several credit cards, for instance, and have outstanding balances on each of them, you may choose to consolidate those debts onto one credit card with a lower interest rate. Be sure to read and understand the Terms and Agreements section (otherwise known as the fine print) BEFORE you sign the credit card agreement. You may find that the lower interest rate you are offered was actually a lower rate that is only available for a short period of time, and then rises significantly. Other credit cards require a minimum amount to be charged on the card in order to maintain the promotional rate. Also, it is important to consider your credit rating. Typically, you need to have a good/high credit rating to receive a promotional offer that is worth convincing you consolidating your debts.
Using secured loans – Secured debts such as your home are sometimes used to pay down unsecured credit card debts because mortgage interest rates are typically lower than credit card interest rates, and there is a tax advantage to being able to write off interest payments. This can be done by taking out a second home mortgage or a home equity line of credit. However, you need to ask yourself several questions before considering this method as an option to pay down debts. 1.) Is my home worth more than I owe on it? 2.) Will I end up paying more in interest payments over time if I consolidate?