When you are struggling to pay several multiple debts, you can use a debt consolidation loan to ease your burden. You can use this loan to pay off your debts and save money. Be cautious when you are picking a loan or line of credit for consolidation purposes. You should also develop a plan to live a debt-free life.
In the United States of America, lots of people owe credit card debts, and this means that a lot of people are looking for ways to get out of credit card debts. One of the main reasons why people’s debts keep accumulating is high-interest rates. Over time, the balance grows, and you will be required to pay way more than you actually owe. The high balance makes it difficult to repay the balance. However, debt consolidation can help you pay off the debt. With debt consolidation, you will get lower interest rates, and you may even get the chance to pay your loan faster.
Debt consolidation involves taking out a loan or line of credit that covers your debts along with the accumulated interest rates. You will use this loan to repay the debts and then start paying the new loan in monthly installment.
The idea is to get a loan with lower rates so that you can save on interest rates. A loan that allows you to make a single payment at the end of every month for a fixed term.
When you consolidate your debt the right way, more money is available for you to pay the principal instead of the interest rate. Thus you can save money and get out of debt faster.
There are several ways to consolidate your debt. They come with advantages and disadvantages. Let us check the common debt consolidation methods.
This consolidation method is where you transfer your high-interest debts to a card with zero interest rates or low-interest rates. The zero or low-interest rate is available for a limited period and, it is ideal that you clear your debt before the credit card company starts charging the actual rate. The promotional period for balance transfer credit cards ranges from nine months to twenty-one months. If you manage to pay off your debt before the period ends, you will save a lot of money.
Unfortunately, there are some downsides you should watch out for when you apply for balance transfer credit cards.
Credit card companies charge fees for transferring the balance to the new card. Some companies charge up to 5% of the total amount transferred. Do your calculations to see if the fees are reasonable. If the fees are too high, it will absolve all the money you would have saved on interest rates. Then there will be no point in consolidating your loan.
Another risk involved in this method is the length of the promotional period. In some cases, some people are unable to pay up the debt before the period ends, and the company will start charging high rates, which brings them back to their old situation.
If you have a home in your name, you can use it as collateral to borrow money to consolidate your debt. The amount of money you can borrow will depend on the type of property you have. The amount will be based on the value of the house. If you have an outstanding balance, it will be taken from the total amount that you can borrow. However, you will still get enough funds to pay off all your debts.
Using your home as collateral for a debt consolidation loan is risky. You can lose your home if you are unable to make payments as scheduled.
It may sound like a great idea to borrow money from yourself to pay off your debts. But, not all situations allow this kind of arrangement. It also comes with a lot of risks. If you are unable to make a full payment, the unpaid balance will be considered as a distribution. If you are not more than 59, you will end up paying a huge tax on the distribution. In a case where you lose your job or decide to leave your job, you will be required to pay the full loan immediately. Another negative aspect is that, you will not enjoy increase in market prices on your retirement fund.
You can also consolidate your credit with personal loans. The rates you will get on this type of loan depends on your credit score and income. If you have a low credit score, likely, you may not access a loan with a low-interest rate.
Debt consolidation might help you to pay up your existing debt, but if you are not cautious, you can easily slip back into more debt. You need to adjust your lifestyle to ensure that you don’t overspend. You can use these three steps to ensure that you stay on track.
The four common ways of consolidating credit card debts have been discussed above.
Your credit may take a hit when you apply for loans or credit cards to consolidate your debt. However, debt consolidation will improve your credit in the long run.
All the methods discussed above allow you to consolidate on your own.
To protect your credit score, avoid applying for multiple credit cards or loans at the same time. Choose the best loan and apply for one at a time.