Debt is one of the biggest issues plaguing the present generation, and it doesn’t help that it is tremendously easy to accumulate and very hard to pay off. Things get worse when you realize the sheer number of sources of debt, ranging from loans to credit cards and so on. If you feel you are in over your head, you could consider debt consolidation as an option to manage and mitigate these debts.
Debt consolidation lets you bundle your debts into a single loan with a low rate of interest and a more flexible timeline. This lowers your monthly payments and makes it much easier to manage your debt. Debt consolidation loans come in four standard forms.
Personal loans can effectively be used for consolidation if you are able to borrow a large enough amount. They are unsecured in nature and require fixed payments over a period of time. Once approved, you can use it to consolidate debts, but the approval is the tough part because someone juggling a number of debts might not have a great credit rating which is important in deciding not only eligibility but also the interest rate granted for a personal loan.
Since the lender is more concerned about recouping his money and the loan is unsecured, they will set a higher interest rate for weaker applicants. Taking on debt to get rid of debt isn’t a great idea, and a high-interest loan might not save you money in the long run either. However, if done properly, a personal loan is very sustainable and a suitable consolidation option.
Credit Card Balance Transfer
By using a credit card balance transfer scheme, you essentially move the balances of multiple credit cards onto a lower-interest card. It is worth keeping in mind that low rates of interest are usually promotional and tend to expire after a few months. It means in the worst case scenario you might be stuck with an atypically high rate for the balance after this period.
You should read the fine print carefully and ensure you switch to a card with a substantial credit limit. A potential pitfall of debt consolidation via balance transfer is the fact that your credit score could be hit because you put too much debt on a single card. That said paying it back will certainly affect the credit score positively.
Home Equity Loans
When you use your house as collateral to take out a loan, it is termed a home equity loan. You are expected to have a decent credit situation and a fair amount of equity in your house. Since it is a secured loan, the interest rates will be fairly low. However, you will face foreclosure if you default on payments. Unless you are very sure of what you are doing, most advisors agree a home equity loan is not the best idea.
Debt Consolidation Loans
Banks and credit unions offer specialized debt consolidation loans with the explicit purpose of combining debts. There are no set terms so you have to specifically investigate each lender and make an informed decision. The interest rates are almost always attractive, but the lower monthly payments are often due to an increased repayment period, which means you might end up paying more interest in the long run.
Debt consolidation is a great way to mitigate and eventually get rid of debt entirely but it is important to remember that getting a consolidation loan does not immediately imply you are debt-free. You have just shuffled your debt, made it easier to repay but you will still have to pay it back. You might be tempted to borrow more but this is a very bad idea in the early stages. Enforce some discipline and judge your decisions well; you will be debt free in no time.
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