Before Getting a Debt Consolidation Loan, Ask Yourself These 3 Questions

For consumers carrying a large debt load, life can be a very stressful experience. Managing payments and dealing with creditors is difficult when you are barely keeping your head above water and having trouble making ends meet. Consumers can get into a vicious cycle of cash shortfalls and continuing to use credit cards just to make it through the month. When they approach the brink of insolvency, they begin to look for solutions to deal with their oppressive debt.

Many consumers, in fact millions, are carrying debt loads that are too much for them to handle. Much of the debt they are carrying is credit card debt. As of the end of the first quarter of 2017, Americans reached an all-time high in their levels of consumer debt. A recent article in the New York Times noted that household debt surpassed the previous high-water mark reached at the beginning of the financial crisis of 2008.

With household debt soaring to new heights, many consumers are considering debt consolidation loans as a means to manage their oppressive debt. While debt consolidation can be a viable means to managing one's debt, there are certain pros and cons to consider and questions every consumer should ask before taking that path.

However, before we cover those questions, let's take a deeper dive into debt consolidation loans.

What is a debt consolidation loan?

Debt consolidation loans help consumers by combining all their debts into one loan that has a single payment. The hope is that the interest rate will be substantially lower than what the consumer has been paying on individual credit cards. This likely would mean that the new payment would also be substantially less than the sum total of the consolidated payments. In addition, making just one payment per month instead of many streamlines the process and takes some of the strain of the debt burden off.

By reducing the outflow of cash, the consumer has a chance to get on top off his or her debt problem or put more money towards paying off the debt. Debt consolidation loans come in several forms, and choosing the right one is an important step in resolving one's debt. Give careful consideration to details of the consumer's individual circumstances such as how much the individual needs to borrow and his or her current credit score.

Many consumers who are homeowners look to utilize the equity in their homes to address their debt problem. This is only possible, of course, if the consumer owes substantially less on the mortgage than the home is worth. Many times, this equity comes via a Home Equity Line of Credit, or a HELOC. If the borrower receives approval for the line of credit, he or she is free to use the funds in any manner, so it's a suitable way for consumers to consolidate their debt. HELOCs usually require the borrower to have a large amount of equity in the home, have a good credit score, and be able to show a verifiable source of income.

Other borrowers will choose to utilize the equity in their home by refinancing their mortgage and taking additional cash out to pay off their debts. The consumer borrows more money than the current home mortgage balance and uses the excess to consolidate credit card debt into the mortgage. As with a HELOC, for a consumer to qualify for a home refinance, he or she would need a favorable credit score, adequate equity, and verifiable income.

For consumers who have credit card balances that are relatively small, a personal loan might be a viable option. Banks and finance companies usually extend these loans to consumers who have decent credit scores and a low amount of debt. Interest rates on personal loans are usually less than what credit card companies charge, but the term of the loan is usually relatively short, compared to mortgage loans. Many consumers take out these loans to get their credit card debt paid off quickly.

The upside to debt consolidation loans

Debt consolidation loans can help consumers get on top of their debt problem. Consumers should consider some of the advantages of consolidating debt.

Just one payment

For many consumers, one of the more attractive things about obtaining a debt consolidation loan is taking all of their debts payments and combining them into one payment. Having just one payment to make each month helps consumers stay organized and avoid missed and late payments.

Reduced payments

Most consumers consolidate their credit card debt to reduce the amount of money they are paying out each month. If they are able to get a much lower interest rate, they could see substantially lower payments, depending on the length of the terms. This could help consumers save money for emergencies or put more money toward their debt each month.

Lower interest rates

Debt consolidation loans such as mortgage refinances, HELOCs, and personal loans will nearly always carry a lower interest rate compared to credit cards. This will result in lower payments that can help a consumer be better able to make ends meet and stop living paycheck to paycheck. In fact, if they save enough money each month, consumers may be able to begin saving money as a protective measure against financial emergencies, such as medical bills, expensive car repairs, or even job loss.

Get caught up

For consumers who have been struggling to keep up their payments, or are behind in their payments, a debt consolidation loan can be a breath of fresh air. With all their credit cards accounts paid off, and their debts consolidated into one, they can focus on getting their financial lives back on track and stop worrying about late or missed payments.

Moreover, if their new, lower payment allows them to open a savings account, they may be able to create some financial security for their family instead of depending on credit cards to make ends meet.

The downside of debt consolidation loans

Debt consolidation loans carry some significant advantages for consumers who utilize them to address an oppressive debt problem. However, some potential drawbacks to debt consolidation loans are of note for consumers to be aware of when considering a consolidation loan.

Some consumers may be at risk of accumulating credit card debt again

Consumers that do the hard work and maintain the self-discipline to pay off their credit cards one painful payment at a time learn valuable lessons about money management. Because of this, they are much less likely to fall back into debt than those who have utilized a debt consolidation loan to address their debt problem.

Debt consolidation, especially mortgage-based consolidation loans, tend to “sweep debt under the rug” for many consumers. The process is just too easy. The danger of this is that, by not going through the difficult process of paying off debt through hard work, the consumer could end up accumulating more debt on top of an already bigger mortgage. If this happens to a large degree, a consumer could potentially put his or her home in danger of foreclosure if unable to meet their obligations.

Consumers may pay more interest over the life of the loan

Rolling debt into a mortgage loan could mean that, even with a lower interest rate, consumers could end up paying more interest in the end. This is because mortgage loans have much longer loan terms. Mortgage loan terms can vary, but most are 30 years. Consumers should put a calculator to the numbers to make sure that consolidating debts into the mortgage makes sense.

Consumers may not change their spending practices

Many consumers do not change the way they manage their money after consolidating their credit card debts. If this is the case, they can find that not much changes for them after debt consolidation. Many times, the extra cash flow created with debt consolidation is eaten by poor spending habits. Therefore, consumers may find themselves relying on credit cards once again to get through the month.

Three questions to ask before you get a debt consolidation loan

Before making the leap to consolidate credit card and other debt, ask yourself three questions to make sure you are making the best possible financial decision.

1. Have I made the necessary lifestyle changes to make debt consolidation successful for me?

It is important to recognize the circumstances that put you into debt in the first place. If you have been overspending and being irresponsible with money, this will need to change for debt consolidation to work. If you continue to live above your means and start relying on credit cards to make ends meet, you will soon find yourself back in debt again.

If your problem has arisen from circumstances beyond your control, such as an unexpected illness or injury or the loss of a job, make sure your situation has improved and that you will be able to meet your obligations going forward. A debt consolidation loan can only make your financial situation worse if you continue to rack up debt in addition to your new loan.

2. Have I chosen the right type of loan for my circumstances?

As mentioned above, several types of debt consolidation loans exist for consumers to consider. It is important to remember that bundling your debts into your home mortgage comes with some risk. If you are unable to meet your larger mortgage payment, you could be putting your largest asset at risk. Losing your home to foreclosure is a monumental, catastrophic event, so be sure you are not inviting that risk with a new debt consolidation loan.

If your debts are not too large, and you are looking to pay them off quickly and efficiently, then you may consider a personal loan. Personal loans can be a good choice for those consumers who have good credit and relatively small credit cards balances.

3. Are there other options available to me other than a debt consolidation loan?

Debt consolidation can be a good option for many consumers, but for those who've had money issues for some time, qualifying for a loan may come with considerable challenges. If you are willing to put in the hard work and remain diligent about paying off your credit card debt, you could potentially handle your credit card debt repayment on your own.

DIY debt management

Those who have the self-discipline to take on a DIY debt management strategy have a couple of options to consider. One is to simply look at your statement and determine, from the information on the front page, what payments are necessary to pay off your balance in three years. All credit cards companies must provide you with this information on their statements. Then, you simply pay that amount, every month without fail (for every card), and you will be free from credit card debt in 36 months.

Or, you could utilize the “snowball method” where you start with the lowest balance first, pay as much as you can on it every month, and just pay the minimum on everything else. Once the lowest is at $0, you move to the next, and so on, until all debts are gone.

Consumers who are unable to make any progress with their debt on their own and are unable to qualify for a debt consolidation loan might consider working with a debt management company. National Debt Relief works with consumers to settle their debts with creditors by negotiating a lump sum settlement. While the process isn't fast, it's far better than declaring bankruptcy.

Getting on top of a burdensome debt load can be difficult for many consumers. It's important to remember that acting before options become few is imperative. Take the first step today and get your debt under control so you can get back on the road to financial peace.

Guidelines that determine whether a debt consolidation loan is a good debt relief option

thinking about debt relief optionsWith multiple loans to repay monthly, insufficient funds to repay the loans and confusion over due dates, it would seem like a brilliant idea to have all your debts consolidated into one loan that can be repaid monthly. Perfect solution, right? Wrong! Why? Because you won’t have researched about the debt consolidation plan offered and its suitability in your situation.

The following ideas will guide you in determining whether you need debt consolidation:

  • Types of debt consolidation loans and associated risk

The debt consolidation loans can be secured against your financial assets, giving the lender the chance to claim your assets if you default payments.

The other loan is the unsecured loan which the lender has no claim on your assets if you default payments. If your assets or home isn’t put at risk, then the best solution for you to manage your loans would be debt consolidation.

  • The amount of money you will pay back monthly

Debt consolidation is made easy by most debt consolidation firms offering lower monthly repayment rates. If the reason why you need to consolidate your loans is the inability to repay the current high monthly rates, then you may consider getting a consolidation plan from the best debt consolidation firm around you.

So, if you can keep up the rates offered after consolidation, then you may take up debt consolidation as an option. However, when your monthly interest payments go up, then you should reconsider the debt consolidation plan as it only means that you will repay more monthly.

  • If you wish to change your spending habits

If debt consolidation is the only way for you to minimize your spending and maybe even save more, then you should call number 1 debt consolidation company to help you out. It is important to make such a decision after thoroughly evaluating the risks involved.

For instance, a zero percent promotional credit card loan consolidating all your credit card balances and other loans works if you wish to stop spending haphazardly, and if you wish to repay all your debts within a specific duration.

  • If the lengthened repayment duration will not cost more

Extended repayment periods stand out as the catch behind consolidation. Most plans involve extending the time frame for repayment to reduce the monthly repayment rate. If this is the case with you, then how beneficial is consolidation? In such cases, you should reconsider your repayment plans.

  • Will you save any money?

This is what most people fail to ask when considering debt consolidation. This is because they think it as an impossibility. It isn’t. Debt consolidation reviews from the best companies show that you can save up money when repaying your loans within the same repayment periods, at a lower interest rate. This is what you should look out for. If your $10,000 dollar loan costs $3,000 dollars in interest and fees under consolidation when you are currently paying around $4,200 in interest and fees, then consolidation is appropriate.

  • How much is charged in fees and charges?

The terms and conditions set by some consolidation firms are really high and they will result in higher monthly repayments. These plans should be shunned.

Your financial consultant should also shed light into the headline interest rates known to cost more as arrangement fees.

In conclusion, the best repayment plan after debt consolidation must save you some money, reduce your monthly repayment rates, it mustn’t cost more in the future and your property or assets shouldn’t be at risk of being repossessed. You may also consider other strategies like cutting down on your spending; live within your means. If all the above concerns are favorable, then debt consolidation would be your best option.

4 Types of Debt Consolidation Loan Options

The year has just begun and you probably want to progress without any additional debt. Perhaps you wish to get a hold of your finances this year and cut down on spending. If this is so, then you should consider looking for a debt management system.

Besides there being a big number of credit management service providers, it would be prudent if you’d consider debt consolidation. This is a debt refinancing process that involves taking up a big loan to pay off small outstanding loans and debts. This has been shown to be an effective consumer debt management system and is therefore common in personal finance institutions.

Debt consolidation loans make debts manageable since you will be servicing one loan rather than multiple small loans and debts that can slip off your mind when due. Often, there are lower rates charged on the debt consolidation loan compared to the average rate on the multiple debts.

So, do you think that debt consolidation is your way out of a financial crisis? Do you know the most preferable or suitable debt consolidation process? Here are the 4 main types of debt consolidation processes:

  1. Consolidation through a debt consolidation company

Statistics show that there is an ever increasing amount of consumer debt. To help many people in need of debt relief or management solutions resolve or manage this, there has been a subsequent rise in the number of companies offering personal finance solutions.

One of the solutions or services provided by such companies is debt consolidation. You will easily come across firms exclusively offering debt consolidation. What happens is that you will receive advice on debt management alongside the loan. The company often pays off your creditors then you are left with one loan owed to the company. This gets your creditors off your neck for good, as long as you don’t accumulate any more debt.

The reasons why you should consider this option is because the resultant (new) loan charges lower monthly repayment since they’re charged lower interest rates. This option often saves money at the end of the repayment period.  If your biggest challenge has been forgetting to pay loans on time, the debt consolidation loan leaves you with only one loan that you can’t forget thus avoids default penalties and late fees associated with forgetting some payments.

Unfortunately, you will not enjoy the lower interest rates on your consolidated loan if your credit rating is poor.

  1. Balance transfer consolidation

Say you have several accumulated credit card debts; wouldn’t you want to transfer all those debts into one card with zero interest rate chargeable? The balance transfer consolidation option is an effective way to clear your credit card’s negative balances if you are certain that you will change your lifestyle and spending, and if you are certain that you will have repaid the debts fully by the end of the zero-interest rate period.

Most companies offering balance transfers on credit card balances give between 6 and 18 months. During this period, you should be able to repay the balances. This is an affordable option compared to normal repayment of a high interest credit card loan. You will, however, pay a transfer fee that is often between 2-5%.

  1. Home Equity Line of Equity Loan (HELOC) Consolidation

A debt consolidation loan is either secured or unsecured. HELOC consolidation is an example of a secured debt consolidation loan. In this case, your home will be used as collateral for the loan borrowed. This solution is effective because you can get a loan of up to 80% the value of your home.

Unfortunately, they do not have fixed terms since the value of your property is somewhat determined by the market. There is no control over external factors in finance. By securing the loan against your home, you will enjoy lower interest rates on the loan. Even though this rate will vary, it will be lower nonetheless. The other downside of HELOC consolidation is that you risk losing your home if you default payment.

  1. Peer to Peer (P2P) consolidation

This is one of the new debt consolidation processes. This is an option that allows people to lend money to each other through P2P lending companies. The P2P companies connect you with people with money they are willing to invest. The investor gains through the favorable interest rate that is charged on your debt consolidation loan. Besides the returns on investments and interest on the money lent, lenders also get satisfaction from helping people in need.

Compared to the loan you will get from the bank or any other financial or credit institutions, P2P loans charge lower interests.

The market is filled with all these options though caution is crucial when shopping for a debt consolidation loan. Some of the precautions you must exercise include:

  • Steering clear of scams

Avoid highly aggressive sales agents advertising deals that are too good to be true. You should also not sign contracts with companies that ask for any form of deposit for registration. Trust your gut instincts.

  • Work with reputable companies

Reputable companies have been in the market for a long time and they will offer the best advice. The chances of the company disappearing with your money are less and you can hold someone responsible. Look out for reviews, comments, and complaints on the company website and review sites to know if a company is trustworthy.

  • Get credit counseling

The reason why you are in debt is probably poor financial management. Do not get to the end of the year with more debt on your back. Create a budget and stick with it. Live within your means.

In conclusion, attaining financial freedom is a challenging but achievable vision. Talk to your finance planner and determine your best debt consolidation process. Change your lifestyle and learn to live without any debt on your back. You should also undertake sufficient research before signing contracts. Follow the advice above and your financial freedom goal will come true at the end of the year.

Recoup Your Finances by Availing Debt Consolidation Loan

It is not that you always need to be neck deep in loans to make you feel so much uncomfortable that you seek ways to get out from it. Even if the loan amount is not much of concern for you there is yet something very important that you want to protect. It is your credit rating that you can hardly allow to be dented. Modern lifestyle is highly dependent of debts for decent living. Debts have been wound around our lives and whether you like it or not, at some point in time you have to turn to it. Therefore, you know very well how good credit rating can make you a good candidate for getting loans. Hence, the need to protect it from getting tarnished, in case you happen to be defaulting with existing loans.

Issues with multiple creditors

Repaying capabilities are not always the reason why people fail to keep up with loan repayment schedules. Although it might be true for some people, most point to the troubles that they face in servicing several creditors. It is common nowadays that people use several credit cards and maintain several loan accounts concurrently. Each account has its own payment dates and consequently there could be several dates in a month when payments have to be made against the loans. This can become quite tasking for two reasons — firstly, remembering the dates is often difficult and secondly, keeping track of finances and allocating funds for timely payments needs close attention. Failed payments could directly affect credit scores that can further weaken the prospects of securing fresh loans.

Reasons for failure

On analyzing the situation that has been described above it will be easy to understand that the problem crops up from the number of creditors that have to be handled.  Each credit account has to be monitored individually to ensure that billings are correct because there are instances when some errors can creep in and add to your woes. Going through many bills every month at different times and matching with various payment dates are no less challenging. Moreover, funds have to be allocated to the accounts at the right time to effect payments. Taking everything together, it is a cumbersome task that can be quite stressful and even difficult to manage that often might lead to missed payments.

Looking for remedy

Considering the realities on the ground, it has to be accepted that you have to find out ways of living more comfortably with credits and managing debts in a smarter way. Although it would be ideal to seek a debt free life but it could be really hard to make it happen.  Rather, finding methods of coping with debts in a better way is a more practical way of tackling the problem.  There are three financial options that you can try out to resolve the problems faced with multiple creditors. All these are aimed consolidation of loans – dealing with a single loan account that replaces many. Read on to know about your options of consolidation.

Take personal loan

Taking out a personal loan can be thought about but it is far from practicable to make it work. Personal loans entail much higher rate of interest that could leave you paying more than what you have to pay now. The terms of payment may not also be favorable. It can affect your affordability and defeat the purpose of consolidation of loan accounts. Moreover, personal loans are given for smaller amount and the sum that it fetches might not be enough to pay back all other loans.

Line of credit against home equity

If you own a house, you can think about converting its equity value into a line of credit for obtaining some money to pay back other loans. While getting the amount you need is not a problem, the interest is also lower and the terms are also extended, it needs careful consideration to decide using this facility. The loan that you get is only for a portion of the home equity with the major part remaining unutilized. Since your home has the potential of bailing you out from much bigger financial crisis, exercising the options for credit consolidation may not be a wise decision.

Get a fresh loan specifically for consolidating debt

Loans are available for various purposes and are named according to it. There are home loans for home making, vehicle loans for buying cars and there is even a special category of loan for debt management which is known as debt consolidation loan. This is perhaps the most used option because it comes with some benefits that are just suited for the exercise. Unlike personal loans, this does not have any limits attached to it and can cover any amount of outstanding loans. It offers lower interest rates and favorable terms can also be negotiated. With the right attitude of using this option correctly to wipe out other loans, it is the perfect solution for consolidation that you have been looking.

Getting the best loan

In order to get the best loan for consolidating debts, there are some methods to follow.

  • Shop around – The money market is highly competitive and you should get a good bargain for the new loan that you will be taking. Do not be carried away by the face value of offers. Do a thorough analysis to understand what your benefits are and then shop around to get the best bargain.
  • Unsecured loan – Look for loans that are unsecured – that is available without asking for any collateral security.
  • Interest cost – While shopping around make sure that you get the lowest interest with favorable terms. This would help to save money through consolidation.
  • Costs and fees – Know about the costs that are associated with the loan – like closing costs that some companies charge. Also know about the fees to be paid, if any.

Conclusion –

Once you have identified the new lender, it is time to make use of the opportunity for not only consolidating the loans but using it to your advantage for recouping your finances.