Debt consolidation is a good debt solution. It makes it more convenient for you to clear your dues.
However, it is not for every situation.
If you want to know about some other alternatives you can consider, keep on reading this article.
Let’s dive right in.
What Are Debt Consolidation Loans?
Debt consolidation is combining several debts into a single debt to pay them all together. This will reduce your stress and you will now have to make a single monthly payment for all of your debts.
A big advantage of debt consolidation loans is that they allow you to negotiate lower interest rates with your lenders. Another good thing about this kind of loan is that it reduces your total number of lenders down to just one, meaning that you would no longer have to deal with multiple creditors.
The first step in getting a debt consolidation loan is to have a good history with credit. If you have a good history, even your credit card company can lend you money to pay off your debts.
Pros And Cons Of A Debt Consolidation Loan
One of the pros of going for this solution is that your finances are simplified. Your repayment plan now only consists of one single payment to your creditors. You also don’t have to worry about the constant phone calls from several creditors.
Another benefit is that you can play around with interest rates and negotiate a lower one on your debt.
However, this can go both ways as you may have to end up paying a higher rate over your debt. The amount of interest charged is not guaranteed to go down or up.
Another con is that there are a number of upfront fees which you will incur while taking this loan. These include balance transfer fees and annual costs. However, the outstanding amount can be cleared with a single payment.
Other Alternatives For You To Consider
While debt consolidation can be a good way to solve your money problems, you must also know about your other options so that you can make an educated choice. Let’s look at a top few options to consider:
Credit Card Refinancing
Credit card refinancing is moving your debt from one credit card company to another. This is beneficial as it might get you a lower rate. Moreover, some plans charge no additional debt fees for around 18 months after you refinanced.
Debt Management Plan
This solution allows you to pay your debt back at a rate you can afford. Your DMP provider will talk directly to your creditors and will make sure that all the money you pay into the DMP goes towards paying back your debt.
If you cannot afford your current rates, you could get a mortgage against a property that you own. Mortgage usually has very low interest rates as it is directly related to your property. This means that even if you have a bad credit history, you could still get a lower rate.
Credit Counselling Programs
Credit counsellors are people who help you in financing appropriately to pay off your dues. They also will talk to your lenders about a lower rate on your debt. Moreover, they will advise you on how to budget according to the total amount of money you owe.
Pursuing Debt Settlement
If a windfall comes your way, you can choose to settle your debt immediately in one big payment to your creditors. The sudden payment can also cause your creditors to waive some amount from your dues due to the immediate repayment.
Bankruptcy is a process initiated by a debtor who cannot repay any of his dues. People who cannot pay back their owed money seek relief from some of their debt. Bankruptcy is initiated by a court order so your lenders have to comply with it.
However, after bankruptcy, you cannot take a loan for a long time. Also, it stays on your credit file from seven to ten years after filing for bankruptcy. This should be the last option to consider when struggling to pay off your debt.
Frequently Asked Questions (FAQs)
Do Consolidation Loans Hurt Your Credit Score?
Yes, at first your credit score will take a hit. However, if you pay the payments on time, your credit score is likely to go up in the long run as you will now have to make a single scheduled payment, which isn’t that hard to miss.
Is Debt Consolidation A Bad Idea?
It is a bad idea only if you have a poor history. When people give you their money, they decide the cost of debt based on your credit history. If you have a poor history, there is a high chance that you will not get a lower rate than before.
Keep this in mind while making your decision.
What Is The Best Alternative For Consolidating Debt?
Balance transfer credit cards are a good debt solution. One of the biggest benefits is the fact that you won’t have any additional costs on your debt for a period of up to 18 months. However, there are some pre-existing conditions on a balance transfer card.
Make sure that if you go for this alternative, you pay off your existing debts before the introductory period expires and that you don’t take up extra loans from people.
What Can You Include In A Debt Consolidation Loan?
Bills like payday debt, credit card debt and medical bills can be combined into a single larger debt.
Is It Better To Get A Personal Loan To Repay Your Credit Card Debt?
It is one of the options to consider, but maybe not the best one if you can’t negotiate a lower rate on the personal debt you’ll be taking. The amount of money going in your cost of debt payments should be lower on your new loan.
Make an educated decision and make sure to do enough research before deciding on a debt solution for your finances.
Get professional help with your decision as well because good advice can go a long way when dealing with debts.
For more free debt advice, keep reading our articles and if you need more help, do reach out to us.