A Guide to Debt Consolidation you will need to Read

Holding multiple debts? Paying them off can be a strenuous process. You may have heard about a “debt consolidation loan” before. This process allows you to pay multiple debts, like credit cards, medical debts, student loans, and personal loans with single monthly payments, rather than making lots of little ones.

Did you know there a many ways though that you can do one of these loans? You need not worry – we can help you out. Read on to know how to help you get access to the right debt consolidation strategy.

How does it work?

When you take a debt consolidation loan, your old loans are marked as ‘paid off’, except the balances that integrate into the new loan. Lower interest rates reduce the monthly amounts along with the time for repayment. The consolidated loan allows you to pay off your debt faster, and save money.

Is debt consolidation the right way out?

Debt consolidation looks like a fairy tale, but can turn out to be an expensive affair. And it can actually worsen your financial well-being.

Here’s a checklist that’ll enable you to assess whether ‘debt consolidation’ is the answer:

• Debt consolidation fees - an extra baggage

Companies which provide debt consolidation loans impose a fee which gets added to the loan taken out, thereby increasing the loan amount and perhaps the term of repayment. This is supposed to elevate your burden instead of minimizing it.

• Extensive monthly payments and longer duration

Your monthly payments may rise substantially due to extra charges. It may take you extended years of repayment in that case.

• Soaring interest rates

In case you’ve missed timely payments on your debts, your credit rating may have faced a severe blow. That way, you can borrow money only at higher interest rates. This means that you’ll have to repay more money in the long run.

Take some time out to analyze your income and expenditures statement to see whether the cash flows will be enough to afford repayments. Struggling to pay off the current debts will make repayment of debt consolidation loans a grinding process.

If you think you’ve successfully cleared all the hurdles mentioned above, the idea of debt consolidation loan is good to go.

Debt consolidation options

There are plenty of options available for debt consolidation perfectly suited to your needs. Let’s dive into some.

1. Credit card balance transfer

This is an option wherein you can transfer all your debts to a single credit card. This is an attractive option for those who are able to secure a credit card that bears low interest rates. A low transfer fee between two and four percent is the icing on the cake.

2. Home equity loan

This is an added advantage for you as a homeowner. You can use the equity built up on your home and secure a consolidated loan. These loans have even lower interest rates compared to credit cards and other loans.

An interesting thing about the home equity option is that you exchange bad debts for good debts, like student loans and mortgages. They guarantee you fixed rewards in the end. However, if you default, you may lose out on your home.

3. Specific debt consolidation loans

A debt consolidation loan is one among multiple options that will allow you to replace multiple debts with a single debt. You don’t require collaterals such as house, car, or any other assets, unlike a home equity loan to secure a loan. However, you do sometimes need a good credit score in order to secure a loan at lower interest rates.

Click here if you will need help finding debt consolidation companies.

4. Life insurance and retirement plans

This plan provides you with an option to borrow against your retirement savings or a life insurance policy. However, they come with an added risk of penalties and income taxes if you fail to repay the loan on time. Therefore, this option is usually seen as a last resort by borrowers.

Conclusion

Debt consolidation loans are optimal solutions, but you need to avoid the pitfalls on your way. Make sure you make timely repayments and don’t add to your existing debts. With these simple tips, you will have nothing to worry about.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.