No matter how much you work and how big your salary is, there is always a risk to find yourself in a difficult financial situation. There is a variety of circumstances – some of them depend on you but some don’t. Your only way out may be a loan.
Want to buy a new car, new flat or house? Not to mention that emergency expenses may arise at any time – repairs of your car, home renovation, purchasing of household appliances, having health issues, etc. Or you maybe you are planning to make a self investment by spending this money for studying? Everyone has certain life goals – getting a degree at the university, learning a new language or gaining some new professional skills. Money should not be a serious obstacle while you are young, energetic and full of dreams.
Sometimes, you may need more than one loan. That decision will additionally complicate things for you. We are not talking about an inability to repay them in time. Staying focused and keeping track of your loans may be stressful and hard at one point. That is why you should consider using debt consolidation in such cases.
What is consolidation?
If you think that you have too many loans to pay back, then a consolidation is undoubtedly the best option for you. In brief, that is a combination of multiple loans into one single loan payment. Some companies even suggest bad credit consolidation loans to consolidation management involves two options: debt consolidation programs and debt consolidation loans. Both of them allow you to:
Make only one payment a month, therefore you will save time;
- Pay a monthly payment may which is lower than the overall sum of the payments you had to make before;
- Have lower interest rates compared to the interest rates of your previous loans.
Banks and various credit organizations offer debt consolidation loans. The good news is you can use a consolidation for repaying a wide range of liabilities: payday loans, credit card debts, student loans and others. Loans can be divided in the following general groups:
- Secured loans – you are obliged to provide collateral: your car or home. The other requirement you must meet is to have a high credit score. Surely, there are costs connected with that kind of loan, for instance origination fees. You will not be disappointed by the interest rates though.
- Unsecured loans – many credit unions, banks and other institutions provide their customers with high interest loans with no collateral needed. The most common example is a credit card. Unsecured loans are intended for people who have a credit rating which is higher than the average. You must have a solid income as well.
- Peer-to-Peer Loans – those are not so popular because they are new. Peer-to-Peer loans are available on several websites. They suggest financial help for small businesses and individuals. The amount you can borrow are relatively small and the interest rates are high – 35% or less. The latter depends on your credit score. Those loans are short term – up to five years.
When it comes to making a choice between debt consolidation loans and debt consolidation programs it is very easy to get confused. Both financial terms may sound and seem almost the same at a first glance but there is a major difference between them. Debt consolidation loan is a completely new loan which combines your old loans. If you have a sufficient monthly income and an overall good credit score, then a debt consolidation loan is recommended for you. And here comes the question: what is a debt consolidation program?
Debt consolidation programs
That is a service usually offered by most credit counseling institutions. Debt consolidation programs will help you manage your multiple loans in a better way. Thanks to it, you will be able to focus on dealing with only one liability at a time. One of the greatest benefits for you is shortening the time period for paying back your loans – you may be able to handle them within three to five years.
Take a look at the essentials you must know about debt consolidation programs:
- Begin with counseling – before you make a decision, make sure you are fully informed about everything
about the particular debt consolidation program. Find a for-profit company or a non-profit credit counseling agency. Do not hesitate to ask questions about your fees or how the firm works. Find out as many details about the plan as possible. Search for customers’ opinions and recommendations. If you are not satisfied with the offer, choose another organization.
- Do not forget about the fees – even if you use the assistance of a non-profit credit counseling agency, do not expect that their help will be free of charge. You will have at least a setup fee and probably monthly fees. Make comparison between the charges of the various companies and then choose one. It is necessary to save some money, especially when you have financial difficulties.
Only unsecured debt is valid when applying for debt consolidation programs
– your loans must not be secured by collateral in order to take advantage of a debt consolidation program. That includes auto loans, credit cards, home loans, personal loans and some types of student loans.
- Your loans will still exist – a debt consolidation program is not another loan. It does not change the status of your current loans as well – you are not moving them around. Debt consolidation programs will just make things easier and more comfortable for you. The obligation to pay to each of your creditors will automatically drop out. You will have to make a monthly payment to your service provider only. The company has the responsibility to communicate with your creditors and distribute your funds between them.
Do not accumulate any new debt – the purpose of debt consolidation programs is to eliminate your liability. You must agree that it is not a good idea to take out any new loans. What’s more, you will have to close most of your credit cards.
- Possibility of lowering the amount of your monthly payments – there is a good chance to pay less every month as most of your funds will be used for debt reduction. The interest rates may become smaller than the initial ones. Any penalty fees may be reversed. So far, everything seems perfect, right? Of course, the fees you have to pay to your chosen company will remain.
- Bad effect on your credit rating – in addition to all the benefits listed above, there is a downside you should not neglect. Using a debt consolidation program may cause damages to your credit score. The company provider of a debt management service will have negotiations with your creditors in order to reduce your payments per month. That is likely to happen and then your credit ratings may lower. If your credit history used to be ideal, then you will definitely feel the influence.
No matter whether you prefer debt consolidation loans or debt consolidation programs, you must be very careful. Both of them have undeniable advantages and disadvantages. Make sure you read your contract very well, including the fine print. Pay attention to everything written there. It is possible to end up with a debt consolidation loan which is in fact larger than your smaller loans in total. If there is something you do not understand, then talk to an expert and check everything thoroughly. If you find something wrong or assess the offer is not good enough for you, then you should try and find another credit company. Only after you are aware of all the terms and conditions and you accept them, you can safely sign your treaty.
Other forms of debt consolidation
Except for debt consolidation loans and debt consolidation programs, there is one more form of debt management which has become increasingly popular nowadays. It is called ‘a balance transfer loan’. That gives you the ability to consolidate your credit card debts into one. Some financial institutions offer an introductory period for their clients. That means the interest rate will be zero for six to twelve months.
How to pick a debt consolidation program?
If you are up for a debt consolidation program instead of a debt consolidation loan, then you should start your research as soon as possible. You will see that there are plenty of companies out there which offer very similar options but still have their differences. Your goal is to sort out all the data you can find and draw your own conclusions. That is not going to be an easy task. Read customers’ reviews and begin asking around. Research on the biggest and most reputable debt consolidation companies. They are certified and listed online in a public register so everyone has easy access to useful information about them.