Credit Debt Solutions: What About A Debt Consolidation Loan?
When you have overextended yourself, you will probably lay awake at night wondering if you will ever find a solution to your credit debt.
I understand that you do not want to ruin your credit by filing bankruptcy, but perhaps one of those debt consolidation loans might provide debt relief, right? Well, many lenders out there are offering debt management solutions in the form of “attractive” debt consolidation loans.
But, as with any of the debt solutions out there , buyer beware.
Let’s take a short look at how you can use credit card consolidation loans to get credit card debt help without getting burned.
Debt Consolidation: What Are Debt Consolidation Loans?
Getting A New Credit Consolidation Loan. Simply stated, debt consolidation (such as credit card consolidation or medical bill consolidation) involves combining all of your separate debts into one new debt consolidation loan with a lower monthly payment and (hopefully) better interest rate. Because the lender extends the term of the (combined) loan and (hopefully) lowers the interest rate, the new loan can be paid off much more quickly, even with the lower monthly payment.
Initiating A Balance Transfer Request. If you have a credit card with a large limit, you can use a credit card balance transfer (either by check, phone or internet) to combine your credit card debt (or other debt for that matter) onto the one credit card.
HELOC Or Student Loan. Other common ways of consolidating debts involve getting a HELOC (Home Equity Line Of Credit) or getting a student loan (if you are a student).
Regardless of the debt solution, your ultimate goal is to get out of debt while increasing your monthly cash flow.
What Are The Advantages Of Debt Consolidation?
As discussed above, credit debt consolidation loans involve several distinct advantages to the person trying to get out of debt.
Lower Monthly Payments. By extending the term of the loan, debt consolidation usually results in a lower monthly payment, thereby increasing household cash flow.
Lower Interest Rate. In the ideal case, the newer loan will have a lower interest rate, thereby allowing more of the monthly payment to go toward principal.
One Creditor/One Monthly Payment. Managing a single debt will decrease your stress about debt. You don’t have to worry about multiple credit card statements, due dates and payment amounts.
What Are The Disadvantages of Debt Consolidation
A HELOC Puts Your Home On The Line. When you use a HELOC or other mortgage for credit card debt help, you are essentially borrowing against your home to pay off that shrimp dinner or plasma television that you put on your credit card.
Higher Debt Service Costs. While extending your debt over a longer period of time can lower your payments, it does not save you money if you are borrowing at a higher interest rate. In fact, the overall cost of the debt consolidation loan may be much more because you are paying more interest over a longer time period.
A Guarantor May Be Required. If you wait until after your FICO score takes a hit, you may have to have a co-signer to qualify for a debt consolidation. If you can find someone who is willing to sign for your debt, then great. But now, not only are you liable for the debt if you default, but so is your friend or relative.
Is Debt Consolidation the Answer?
Getting a debt consolidation loan can be a smart debt solution if you can get an unsecured debt reduction loan at a low interest rate and without a guarantor.
Weighing the advantages and disadvantages of credit debt consolidation allows you to make an informed choice about whether to consolidate your debts or pay them off as is. Even though credit consolidation makes getting out of debt easier, it does not solve the underlying problem of financial mismanagement that probably caused the credit card debt to spiral out of control in the first place.
If you do not take steps to solve the underlying problems with debt management, then temporary debt relief will just camouflage the problems. Eventually, you will find yourself back in the same situation again and again. Replace you bad spending habits with good ones that will allow you to get out of debt and encourage you to find permanent debt solutions for your future.
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- Student Loan Debt Consolidation: Consolidate Student Loans The cost of higher education is spiraling out of control....
- Credit Card Debt Consolidation Guide If you are only able to make the minimum payments...
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