Debt consolidation costs should be one of your considerations when you are trying to choose the right debt solution. There are so many options for you to get out of debt. What you should be focusing on is finding the right one that suits your specific financial situation. If this is your approach, there is a higher chance that you will get out of debt. If the debt relief program suits your finances, that means it is affordable. Not only that, it will help you get out of debt without making you feel too stressed about it.
Back in 2000, a study revealed that people who feel very stressed about debt are more likely to report having poor physical health. It is not surprising since having a lot of debts will really make you worry all the time. And it is not just feeling anxious about your debt payments. It is also about how your current debt compromises your lifestyle. This will really keep you from enjoying your income as you should. It also poses a threat to your financial future.
This is why it is very important that you choose the right debt relief strategy. Of course, the main concern is choosing the debt solution that will help you save the most money. To make that possible, you have to check the debt consolidation costs of every option that you have.
3 debt consolidation costs based on your debt relief strategy
There are many options to consolidate multiple debts. But this time, the focus will only be on the three main options to consolidate debts.
The truth is, debt consolidation should help you save money. That is one of the characteristics that makes it a great debt solution. However, the initial setup will cost you some money. You need to find out what these are so you can calculate if it is still worth it or not.
Balance transfer fees
The first of the debt consolidation costs that you should look into is the balance transfer fees. This is either a fixed amount or a percentage of the transferred debt. There is an option to waive the fee. But this will affect the interest rate on the promo and the length of the promo period. For instance, if you decide to skip the balance transfer fee, you will only get 6 months of 0% interest rates. But if you pay the fees, you can get up to 21 months of 0% interest rates.
So if you want to maximize the savings that you will get from the 0% interest rate, you might just have to pay these fees. Of course, you need to familiarize yourself with the balance transfer terms to know if these fees are really worth it or not. It is best to calculate everything and compare where you can save the most money.
In case you plan to use a loan to pay off your multiple debts, the debt consolidation costs that you need to pay are the origination fees. This is the amount that you have to pay to have the loan application processed. This fee usually an upfront payment so the loan approval process can be completed. Sometimes, lenders will deduct this from the loan itself. Other times, it will be paid separately or through the interest rate.
To know if this is worth it or not, scrutinize the interest rate. If you can save a lot on the interest, it might be enough to cover what you have to pay towards the origination fees.
Debt management fees
The last of the debt consolidation costs are debt management fees. When you start working with a credit counselor, the service is usually given for free. There are a lot of non-profit organizations that provide this service. They only ask for donations but it is not compulsory.
While credit counseling services are free, the debt management service is not. The latter involves the creation of a debt management plan or DMP. This involves the creation of a repayment plan that fits your financial situation. If you need a lower monthly payment, the credit counselor will create a longer repayment plan for you. If you want to get out of debt faster, they will shorten it. The bottom line is, the plan will make sure that you can afford your payments. Once you confirm that the DMP is affordable, it will be presented by the counselor to your creditors and lenders. After it is approved by them, you will begin paying according to the DMP. You will send a single monthly payment to the credit counselor who will distribute your payments to the different creditors and lenders.
Basically, a credit counselor can help you organize your credit payments through the debt management plan. That is the service that you have to pay for.
The cost of not consolidating debts
As you can see, debt consolidation costs will vary. It will depend on the type of debt solution that you have chosen. Before you let the cost bother you, think about what it will cost you if you do not deal with your debts as soon as possible. If you do not consolidate debts, it might cost you more in the long run.
Here are some of the costs of not consolidating debts.
If you have a lot of credit card debts, you are already losing a lot of money because of the high-interest rate. Every time your balance is carried over to the next billing cycle, finance charges are added to that. This charge is calculated based on the balance carried over and the interest rate. So if you have a high-interest rate and a high balance, the charge will be high as well. It will grow your balance and make you spend more than what you should. The longer it takes for you to completely pay off your debt, the more you will spend on these finance charges.
Late penalty charges
Another cost that you need to think about is the late penalty charges. If your debt had grown so much, you might end up failing to pay it off. Or maybe you might forget one payment because you had a lot of credit accounts to monitor. That can all lead to late penalty charges that could have been avoided.
This is why consolidating debts is a really good idea. It will help make your monthly payments easier. Not only that, but it will also allow you to keep track of all the payments. If you do not miss out on a payment, there is a higher chance that you can complete your repayment plan. That means debt freedom is easier to achieve.
Finally, if you do not do something about your debts, you will be forced to miss out on a lot of opportunities. According to reports, almost 6 out of 10 Americans said that their debts keep them from achieving their financial goals. That is one of the costs that you have to make if you do not do something about your debts. The bigger your goals, the more you lose as long as you have debts. If you compare it with the debt consolidation costs that you have to pay, consolidating debts will not seem so bad after all.