How To: DIY debt consolidation, a Better Option.

When your debt gets overwhelming, it can seem like debt consolidation is the only way out, but did you know you don’t need to use a costly debt consolidation service? Here’s how and why you should try the DIY debt consolidation solution.

Debt consolidation is a useful tool for many kinds of debt, whether it be credit card debt, student loans, personal loans, auto loans, etc. But what I am about to detail is probably best used for unsecured and non-tax advantaged debt. That is, any debt without collateral, or any associated tax deduction.

So, that eliminates car loans, home equity loans and student loans, typically. You can consolidate those too, but often times you lose the tax deduction or end up with a higher interest rate without collateral to back the loan.

Why you should avoid a debt consolidation service.

Many debt consolidation companies are little more than rip-off operations. Some simply bilk you with unnecessary fees and payments, while others can actually damage your credit score. Some are legitimate solutions and can offer genuine help, but telling the savior from the charlatan is often difficult. Why bother? You don’t really need them anyway. You’re just paying to have someone else do the dirty work, but that’s also risky.

Some debt consolidation services have been known to tell customers to stop making minimum payments and start making those payments to the debt consolidation agency instead. This only creates bad blood with the creditor and causes interest penalties and fees to be tacked on to the original loan balance. It can also reduce your credit score.

DIY debt consolidation.

Most debt consolidation services charge you for doing what you could do yourself. Once you know how to consolidate debt, it’s easy to do yourself, though it does take time and effort. But remember:

It took time to get into debt, and it will take time to get out of debt.

The basic concept behind debt consolidation is rolling up all your outstanding debt balances into a new loan. The benefit is that you have only one payment instead of many, but the down side is that you just extended the time it will take to pay back all that you owe.

But that’s OK – provided you get serious about paying it back.

All too often what happens is you free up some cash with the new, lower payment and just spend it on other things. What you need to do is put every last dime you can toward that new, single payment. Keep your eye on the goal – getting rid of this payment forever!

OK, so enough of the pep talk. Here are the steps to DIY debt consolidation:

1. Do a status check.
OK, you know you’re into debt up to your eye balls, but just how deep is that? Pull out all your statements and loans and put them into piles: 1 pile is for loans that have collateral (example: car loans) and loans that you can deduct the interest payments on (student loans, home equity, etc..), the other pile is for everything else – personal loans credit cards, medical loans, etc..

2. Start working the phones.
We’re officially in the midst of the Great Recession here, you can use that for leverage. Take all of the loans from pile #2 and call up the creditor and explain to them that you simply can’t make the payments. Ask them to work with you, and either cut the rate, lower the balance, or give you an interest freeze. It can work, but you need to be sure to do 1 simple thing: Be pleasant. Don’t get confrontational and in their face. I cannot stress this enough. If you are pleasant and explain your problem, and approach the conversation from the standpoint of being partner in a business transaction, you will get much further. Your creditor wants to make money, you want to pay back as much as you can and satisfy your original contract, but they need to work with you for that to happen. It may take several calls over several days or weeks, but the pay off can be huge.

3. Total up the damage.
Once you’ve gotten all the concessions you’re going to get from the creditors, you need to total up the damage and see what you’re on the hook for. After that, you can start looking to consolidate.

4. Look for 0% interest credit card offers.
I used this to do my own debt consolidation and I ended up being able to pay off the entire balance before a single interest charge hit! I can’t begin to tell you how much money I saved on that alone.

5. Tap the Equity (if there is any).
If you’re fortunate enough to own a home, and even more fortunate enough to have equity in that home, then try getting a home equity loan to pay off your other debts. This new loan would likely be at a lower rate, since your home is collateral, and the interest payments are tax deductible.

6. Get personal.
If you can’t find any credit card companies willing to let you transfer your balances to a 0% card offer and the home equity route is a dead end, look to personal loans or other credit card offers. Just try to get the lowest rate you can.

7. PAY. IT. DOWN.
Finally, the single biggest part of this process is to pay down your new loan ASAP! That may mean doing without the cable television and eating beans and rice 3 times a day, but this is your freedom and peace of mind we’re talking here. It’s worth the sacrifice. Trust me.

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