Loosely defined, debt consolidation is the combination of most or all of your debts. These debts are typically from unsecured credit cards and can be rolled into a single payment that is normally much lower than the sum of the payments you are making now. So how do you determine if debt consolidation is the right solution for you?
Debt has a way of sneaking up on you. Mortgage loans, auto loans, credit cards and even your medical bills lead you into severe hardship. But it is possible to get out of that situation and become debt free in a relatively short time. You may be required to restructure your spending habits and/or lifestyle. You can do this by consulting a debt counselor. At first, you may feel a little unease, but the end result is well worth the adjustment. Just think how you are going to feel with all your debt wiped clean. You may also gain a tax advantage as the interest on a consolidation loan for your home might be deductible on your income tax return.
First, you must understand what a debt consolidation loan is. Debt consolidation loans make it possible for you to pay several accrued debts with one low payment. Reasons to consider a consolidation loan include
•   To secure lower interest rates.
•   To secure a fixed rate on those debts.
•   To achieve the convenience of managing a single payment opposed to several. It’s just easier.
Debt consolidation loans can move a number of unsecured forms of debt, like credit card debt, into another unsecured type of loan. Most often, though, the consolidation loan is secured with an asset, like a home or a car. This asset serves as collateral and you agree up front to the sale of that asset in the event you cannot make the payments for any reason. By using collateralization, the lender will most times lower the interest rate. Without the collateral, your rate could soar.
In some cases, a debt consolidation company is able to discount the loan amount. If the debtor is facing the possibility of bankruptcy, a debt consolidator may purchase the loan from the original lender at a discounted amount.
The interest rate on debt consolidation loans may be higher than those on home equity loans but they are still significantly lower than ANY credit card APR out there.
For example, if your debt is divided between several cards, you could have interest rates anywhere from about 8% up to as much as 32%. In some cases, where the debtor has a good credit rating AND a decent amount of equity built up in their home, you can expect rates close to those for a first mortgage. Presently, that stands around 7%. On the other hand, debtors with a poor credit rating can look for rates to rise significantly, probably in the range of 15% to 18%.
Most credit counselors offer a free consultation via phone. Take advantage of this and you could find yourself with some freed up cash every month.
Time and again people who find themselves in debt for using their credit cards are often advised to ‘Consolidate your credit card debt.’ But was does it mean when you are asked to ‘consolidate credit card debt.’ Consolidating debt acquire through the use of credit cards is done by using only one or two cards and letting to go of other credit cards.
This is possible by applying for a low interest loan in the bank or by transferring the balance to a new credit card or transferring the balance from one credit card to a new one.
What is there to look for in the process of consolidating credit cards? The important thing to consider is the annual percentage rate or the APR. This is important or could also be the sole criteria to look for in the choice of method you would want to follow in consolidating your credit cards.
In case you choose to consolidate your credit cards through a bank loan make sure the interest on the loan is lesser than the APR of the debt from the credit cards you wish to consolidate. In the same way, if you are considering applying for a new credit card make sure to check that the APR of the new card is also lesser than the debt of the credit cards you are consolidating. But there is something that you should be aware as you consolidate you credit card debt.
The APR rates advertised by most credit card suppliers are the short term APR rates which are meant to lure you to consolidate credit card debt with them. Short term APR rates mean that this can only be used for an initial period of less than 12 months or some other period before the rates go up. Credit card suppliers would offer you low or even zero percent APR for the first 6 to 12 months when you consolidate your credit card debt but the APR rates are higher after that period.
Make sure to check the how much is the higher APR rate. Your decision to consolidate credit card debt will be fruitful only if the new APR rate is lower than or equal to the APR on your current credit card. You can start with inquiring from your credit card supplier if you can avail of a low APR from them. This would make your work on consolidating your credit card debt smoother.
Consolidate credit card debt but before doing so understand that this would be advantageous to you only if you commit to instill discipline in yourself to adopt and follow proper credit card usage like controlling your spending and make sure to pay your credit card dues on a regular basis and on time.
While there are many advantages to debt consolidation, there are a few concerns anyone should be aware of before consolidating.
You need to watch out for scams and non-profit credit counseling companies which are actually for-profit companies, as well as things which are actually a disadvantage to you – sometimes the benefits which a DMP can provide are actually benefits you could get yourself from the lender if you just ask, for example on a student loan, in some programs after a certain number of on-time payments, your interest rate is lowered a little bit.
If you go with a debt management program or consolidate your student loans with a bank or other lender, you start over with the time period, so it can actually take longer for your interest rate to go down.
A disadvantage to debt consolidation through a second mortgage or a bank loan is that this is usually a secured loan. If you do not pay this bill, you can lose your home.
Also, you are still in debt, and usually still in the exact same or a slightly lower amount of debt, just shifted around. Many people respond to this debt consolidation as if they have no more debt, and go out and charge up their cards again. Thus, it is easy for a person in debt to end up in even more debt after they consolidate, and there are only so many times you can consolidate.
Individuals, who have been unable to pay their dues on several cards, may find it difficult to enter into a debt settlement program.
They might be required to undergo counseling service and place their credit card debts under one program. The counselors might also make it possible for you to work on a lump sum payment to pay off one creditor, and while increased monthly payments will be made to other creditors.
Despite being a burden, debts can be managed effectively if one knows where to start and what to do because there are many solutions to this kind of financial problem. It’s only a question of owning up to the responsibility and of course not “hiding” from your creditors.
You have to be open to your creditors about your situation so that you can work on a plan beneficial to both of you. Professional help will also go a long way
An unpaid debt is a very serious problem that needs well-thought of solutions. It does not, as other debtors may have come to believe, vanish if you ignore its existence. Instead it could only balloon to amounts that will make your head spin.
Thus, if you are sensing trouble, don’t hide from your banks and other creditors. It’s best to come forward and be open to them about your situation. Talk to them about going into debt settlement program, an option which could work for you because you are only required to pay a part of the total amount owed.
One of the agencies that offer this program for businesses and individuals alike is the Internal Revenue Service (IRS). The IRS is famous for settling for an amount lower than the total income tax obligations of entities and individuals with tax dues.
The good news is it is not just this government agency that accepts compromise payments from people who have unfulfilled obligations. Private lenders do too. What you should remember is that you will have a bigger chance at this program if start talking to your creditors way before you’re seriously past due. Don’t wait for them to start collection proceedings because once they do, you’re jeopardizing your chances of landing this good deal.
You can initiate debt settlement with your banks too. Banks do not actually like settlements but, for unsecured credit card debts, they will accept this program to avoid expensive and long collection process. Despite receiving a partial payment, these banks are most likely going to be amenable to this agreement because it saves them a lot of hassles.
Remember though, that there will be no turning back once you reach an agreement with your bank. This means, your credit card will be canceled and your credit score will have demerits.
Most people resort to a debt consolidation loan because of credit card debt. There are advantages to this type of loan, as it combines several debts and loans into one, reducing the monthly hassle of multiple payments at high interest rates. For those who are dealing with large debts, a debt consolidation loan can help ease the burden.
One of the most appealing advantages to consolidating a debt consolidation loan is that it makes paying back your debt a simpler process. Instead of a number of debts to pay, all with different due dates each month, consolidating debt allows one payment per month.
The consolidating company is responsible for making sure the payments get to each creditor. Be it a student loan consolidation or credit card debt consolidation, the situation allows the individual to focus time and energy on finding other ways to improve the financial situation.
Another way in which a debt consolidation loan is helpful is that it lowers the rate of interest. Credit cards tend to have high interest rates, so it is always good news when an individual finds a loan at a lower rate.
This lower rate also lasts for the duration of the payment period, though with a consolidated payment plan, individuals pay off the loan for an extended period. Be sure to keep an eye on current interest rates. Interest rates will be determined in large part by what is going on nationally.
It is entirely possible to use this plan to help seek a more stable financial standing. Finding a reputable consolidation company, however, is paramount. Take as much time available to research the many options. The best bet is to go with companies that are familiar and well known.
A debt consolidation loan is a tool to help individuals get on the road to financial health and out of trouble with too much debt and collection agencies, but it is up to the individual to stay out of debt permanently.
These individuals must develop good spending habits and learn how to manage finances responsibly. Taking out more loans to pay off existing ones is never a good idea, so after card debt consolidation, learn how to budget effectively.
A debt consolidation loan can chop your high-interest debts down to size. It can also make life a lot easier by allowing you to make one payment each month. Consider looking into one if you find yourself in a never-ending cycle of debt that you’d like to break.
