How to Choose the Right Type of Debt Consolidation for Your Situation?

The high cost of living and financial commitments sometimes can lead to a situation where an individual has no choice but to be in debt. I understand that just hearing about debt is something that can make you uneasy.

Fortunately, debt consolidation is like an overdraft loan, which can be a great choice for managing and paying off debts. It can assist you in maintaining good financial standing and avoid the necessity for debt collection agencies.

Did you know that India’s Household Debt reached 617.3 USD bn in Mar 2024, compared with the reported number of 486.7 USD bn in the previous year.

In this blog, I will give you an idea of how you can choose the right kind of debt consolidation for your situation. But before that, let us take a look at what debt consolidation is.

[1] What is a debt consolidation loan?

Debt consolidation is basically an overdraft loan, which refers to taking out a new loan or credit card to pay off other loans that exist, such as credit cards. When you combine various debts into a single and large loan, you might also be able to get more favourable payoff terms, like a lower interest rate, lower monthly payments and even both.

[2] How do you select the best kind of debt consolidation for you?

Here is how you can go about selecting the right kind of plan for your situation:

  • Know your financial situation well

Firstly, you have to assess your debt, and you can start by taking a detailed inventory of the debts. Know the kinds of debt you have, the sum that you are owed, rates of interest, and the monthly payments. This sort of evaluation will offer you a clear picture of the financial obligations and assist in identifying the best consolidation tactic.

A comprehensive review of the monthly income is the first step towards this. After that, you will have to sit and take a look at your expenses as well to know about your situation in detail.

  • The DTI ratio

After that, you have to evaluate your debt-to-income ratio. I have made it easy for you to understand it.

First, you will have to sum up all the monthly debt payments. After that, make sure you are dividing it by the monthly gross income. Once you get the number, you have to multiply it by 100, and voila! You have the DTI ratio.

Remember, a DTI ratio below 36% means you can handle additional debts more responsibly, and it is seen as favourable by the lenders. On the other hand, when a ratio is over 43%, it might be a red flag for the lenders.

  • Research the options

Debt consolidation services offer many programs, each with its own benefits and drawbacks. Understanding the various services is key to selecting the right one for your requirements.

Here are some of the programs from which you may consider:

  • Personal loans
  • Home equity loans
  • Debt settlement programs
  • DMPs
  • Balance transfer credit cards
  • Seek professional advice

Prior to making a decision, consider consulting with a financial advisor or a credit counsellor. These experts may offer customized guidance based on the financial situation, assisting you in selecting the most appropriate debt consolidation tactic.

Wrapping Up

So, these are pretty much everything you need to know to decide what kind of debt consolidation plan or Overdraft Loan you will need. While these will certainly help you out, it is always beneficial to consult with a financial expert before you make any decision.

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