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How To Make An Informed Decision About Debt Relief | Financial Planning Tips

How To Make An Informed Decision About Debt Relief

Can you imagine a life free from debt? A life where you can spend your income on things you want instead of paying for things you used to want. The debt free life is reachable. How you get there is a choice you have to make wisely. There are several debt relief solutions available, but you have to analyze each to choose the right one.

One of the biggest factors influencing your decision is the amount of money you’ll have to pay each month. Depending on your budget, you may not be able to put much money toward debt repayment. And if that’s the case, you need a debt relief option that fits your situation. Most people don’t realize it, but you can use a debt repayment calculator like the one from CNN Money to estimate the monthly cost associated with debt relief options, including debt consolidation and debt settlement.

The first thing you must do, if you haven’t done it already, is create a list that includes all your debts, the balance, interest rate, and current minimum payment. That’s the basic information you’ll need to use CNN Money’s debt calculator to analyze your debt.

Paying on Your Own

For many people, the ideal solution is to pay off debt on their own, without help from a third-party. To see what it takes to pay off your debt, put your numbers into the repayment calculator. Then, choose either the minimum payment plan if you can only afford to pay the minimum or the fixed payment plan if you can afford to pay a higher amount each month. Click calculate and the result will let you know how long it will take to pay off your debt with your current payment. Make an experiment and add $100 to your monthly payment. You will be surprised by how much this will cut the total interest you will pay! When deciding how much you can pay per month, always keep in mind that a little extra goes a long way.

This is typically the most expensive way to pay back your debt, in terms of monthly payment, so you may have to live a frugal, scaled-back lifestyle while you repay your debt. You’ll have to be disciplined to stick to a repayment plan that could take several years.

Credit Counseling

If you’re not familiar with consumer credit counseling, this is a debt relief option that creates a debt management plan with your creditors. Your creditors agree to lower your monthly payment and interest rate until your debt is repaid. Most debt management plans can be completed within 3-6 years.

To see the monthly payment required on a debt management plan, lower your interest rates by about 2% and choose a debt-free deadline of four years. The result will give you an idea of an aggressive credit counseling payment, change the debt free deadline to six years to see what your payment would be if you took more time.

You won’t be able to use your accounts while you’re in credit counseling – not that you should use them anyway. While your credit won’t suffer, your credit report will reflect that you’ve had a debt management company manage your account.

Debt Consolidation

Through debt consolidation, you combine all your outstanding debts with a single loan. The old debts are paid off and you’d be responsible for paying back the debt consolidation loan.

To estimate your payments under a debt consolidation loan, enter just one account into the calculator. For that account, list a competitive interest rate like 9% or 10% (lower if you have excellent credit). You can enter anything for the minimum payment. Choose the debt-free deadline option and enter the loan term you’d expect, e.g. 5 years. The result shows you the monthly payment on a consolidation loan with the interest rate and repayment period you entered. Change the interest rate and repayment period to test out various loan terms.

Debt consolidation can be risky. Once you consolidate your debts, your credit lines will all be empty and available for new spending. If you start charging again, you could end up with double the debt that you had when you were started. You must be disciplined enough to cancel the accounts and avoid creating new debt.

Debt Settlement

Under a debt settlement plan, you negotiate to have your creditors accept a low, lump-sum payment as full satisfaction for the debt. Creditors will accept settlement when they believe it’s their best chance at getting payment from you.

Calculating a settlement plan using the debt repayment calculator is tricky, but you can test out various scenarios. You’ll use just one debt, the way you did to estimate debt consolidation. However, the balance for that one debt should be something between 40% and 60% of your current outstanding balance (you can try both or anything higher or lower) since that’s what accounts are typically settled for. Enter anything for the minimum payment. Choose the debt-free deadline option and enter the time period that you’d ideally like to settle your debts, e.g. 3 years. The results show you how much you have to put toward debt settlement each month to settle your accounts in that time period.

When you settle your debts, you’ll have to let your accounts become delinquent. That’s if they aren’t delinquent already. As a result, you’ll suffer damage to your credit score. If your accounts are settled successfully, the settlement will stay on your credit report for seven years. Fortunately, you can start rebuilding your credit before that time comes.

Making the Best Decision

When you choose a debt relief option, you’ll have to look at two things – the amount of money you’ll have to spend and the sacrifice you’ll have to make to follow through with that option. Choose the solution with the monthly payment and sacrifice that you can afford to make.

This post was written by Eliza Collins, a guest writer specializing in personal finance topics like savings, debt relief as well as credit score improvement. You can read more of her articles at the debt settlement blog.

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