Whether you are edging ever closer to bankruptcy, carrying a debt overload or you just seek for better ways to manage your finances, you can’t but explore options like debt consolidation loan. For over a decade, debt consolidation has become a form of financial help for those who are struggling with more debt than they can handle.
Debt can be frustrating emotionally as it comes in several forms. Medical debts, student loans, mortgage as well as high credit card balances are examples of debts that can sweep you off your feet. One’s ability to live a balanced life isn’t about where you live or what you eat, sometimes the sheer feeling of not owing anybody makes all the difference.
Debt consolidation is simply an effort to put together several debts from different creditors and then obtaining a single loan to clear them out. Debt consolidation is considered as a comprehensive solution and by far the most popular type of debt management.
This is because the one big loan that swallows the other ones is repaid at a much lower rate and then the single monthly payment is much convenient. Debt consolidation as well as other forms of managing debt are all aimed at repaying debts in a much more convenient manner. When executed properly, any form of debt management can help you save money and get out of debt faster.
Which form of debt management is best for you depends on several things but the theory that servicing a single debt as against several others makes a lot of sense. Talking about debt management, that’s an option that has provided a huge relief for millions of Americans who have found themselves in more debts than they can handle.
Debt consolidation is not the same as debt settlement although both options are often used in confusing terms. Debt settlement is simply holding a negotiation with creditors to settle a debt with less than the amount owed. It is mostly an option of settling substantial debts with single creditors. In some situations, debt settlement is also an option that can be used to deal with several creditors.
Debt consolidation as earlier described is just a way of merging all the debts from several creditors and obtaining a single loan to offset them all. This form of debt relief is peculiar to people who are trying to deal with credit cards and other forms of unsecured debts.
The two terms are used interchangeably but both have huge differences that exist in terms of its advantages and disadvantages.
Is Debt Consolidation the Right Option?
Debt consolidation may have helped millions of people get out of debt but it is important to stress that it is not a one-size-fits-all. Every form of debt relief has its own advantage, disadvantages, and risks. It is important to consider everything that surrounds debt consolidation if that’s the option you are settling for.
Secured vs Unsecured Loans
Whether or not debt consolidation is right for you also depends on what type of loan you are seeking to repay.
Unsecured loans are based only on your guarantee to pay and not secured with any property that can be repossessed to pay. They are approved without the tendering of collateral. Rather than committing your assets, customers qualify for unsecured loans on the basis credit history and income. Examples of unsecured loans include credit cards, student loans, and personal loans.
Secured loans, on the other hand, are loans that require the pledging of a property. These properties include things like a home, car, or any asset that can be used to repay the loan. For example, if you obtain an auto loan, the lender has the right to take away your vehicle if you stop paying at some point or if it’s a home loan, there is a risk of being forced out and the property foreclosed.
Debt consolidation has its pros and cons just like any other method of debt relief. Anyone having concerns over the vast number of bills and expenses that meets them at the end of each month may be opting for debt consolidation. However, this has more chances of success if their spending habit can be tamed.
Credit cards are the major culprit of the financial hardship most consumers encounter. An average family in America has 3.7 credit cards and owes in credit card debt, up to 15,762 dollars. Add to this a combination of rent, gas, water rates, cable, and several other utilities, that’s a lot of receipts to handle on a monthly basis.
Falling behind on one credit card payment could see the borrower struggling to catch up. As soon as it gets to a point where only minimum payments on one or more bills are the only way out, the debt consolidation should be considered.
Debt Consolidation Pros
- The primary pros for debt consolidation remain one single fact – a simplified process of paying debts. Making a single payment to one lender on a monthly basis at an interest rate that is utterly convenient instead of making multiple payments to different lenders.
- Another advantage of debt consolidation is the immense savings that you enjoy down the line. The new loan obtained to clear out the old ones must have a lower interest rate than the cost of all the liquidated bills combined. This means that you could save thousands of dollars and enjoy some financial relief while servicing a loan.
- Debt consolidation also provides for a better organization because the borrower no longer has to keep tracks of multiple payments. The chances are that if you initially had 5 loans, payment is usually not on the same day. You have to ensure that payment is made for each one on its exact due date to avoid penalties. Debt consolidation provides much relief on this basis by liquidating all the nagging bills into one and on one date making it utterly convenient.
Debt Consolidation Cons
- The cons of debt consolidation are obvious and these limitations should be duly noted. The debts that prompt the need for debt consolidation are not forgiven neither are they reduced. Unlike debt settlement, the same amount is still being owed and if your payments aren’t increased and spending notably reduced, the borrower is back in the debt.
- The time involved can be can also be a major constraint. A debt consolidation program could last for between 2-5 years before the debt can go away. The feeling of having a particular debt linger for so long could adversely affect your financial performance.
Debt Consolidation through Secure Loans
There are many ways for a debt to be consolidated using secured loans. Take your home, for instance, you can refinance or take out a second mortgage as well as opt for a home equity line of credit. A car loan can also be obtained using an automobile or other assets as collateral.
Advantages of consolidating with a secured loan
Secured loans often attract a considerably low-interest rate when compared to unsecured loans. This has a positive implication meaning you can save more money on interest payments. What lower interest rate does is that monthly payment is brought down to a more convenient amount. In some instances, the interest payable is even subject to a tax deduction.
A solitary payment on a monthly basis at a reduced interest rate has more chances of reducing your financial burdens substantially. Secured loans are generally easier to access due to the fact that the lender faces a lesser risk on the investment.
Drawbacks of Consolidating with a Secured L+oan
There are some major issues related to consolidating several unsecured loans into a secured loan. The pledged asset tendered as collateral is being put at risk in case of a gross financial hardship. In a situation where the loan can’t be paid back, the house, car, life insurance, retirement fund or any other asset that has been used to secure the loan will be lost.
The time factor is also a limitation of consolidating with a secured loan. In cases where certain assets like retirement funds and life insurance have been tendered as the collateral, they may be unavailable if you need to use them until the loan is completely paid.
The term involved in consolidating may also be relatively longer than the previous debt obligations that were consolidated. Along the line, the total interest accumulated over the span of the consolidation loan may transcend what you would have paid on individual debts despite the reduced monthly payments.
Debt Consolidation Through Unsecured Loans
Although unsecured personal debt consolidation loans gained a lot of popularity over the years, their availability to those who need them today may be difficult. The primary requirement to obtain an unsecured loan is to have good credit.
Pros of Consolidating with Unsecured Loans
The most obvious advantage of an unsecured consolidation loan is that no property is involved and this takes away the risk. Although the interest rate is higher than its secured counterpart, it is surely lesser than what would be charged on several credit card balances. This, therefore, lowers the interest burden and the total amount payable.
Drawbacks of Consolidating with an Unsecured Loan
An unsecured loan is usually hard to obtain due to the credit score requirement. Most consumers who need debt consolidation loans might not qualify.
The interest rates of unsecured loans are generally higher when compared to secured loans
The benefits of debt consolidation into one loan and one monthly payment may provide great relief but the downside is that you could begin to feel somewhat confident about your finances and this may be a little premature. The borrower can become complacent and start racking up additional debts while the consolidation process is still on. This is why some borrowers opt for alternative debt relief systems.
Debt Consolidation Alternatives
Debt consolidation as a way of getting out of debt is usually the first option considered by a lot of persons looking for a way out of their overwhelming credit obligations. It’s true that a debt consolidation is an effective option but its effectiveness is dependent on some factors.
Financial experts in some of their analysis have questioned the logic of obtaining debt to offset another. It’s really not a welcomed option to some borrowers because it’s also a loan and it’s been likened to postponing the evil day. Instead of servicing diverse debts from different creditors, you are left with one that still needs to be paid month after month.
This doesn’t take away the fact that you still owe despite the more convenient circumstance.
There are a lot of considerations you need to make before selecting your preferred debt solution. A good credit score and acceptable collateral are major requisites to access a low-interest loan. The absence of both means that other debt relief programs might be an alternative and they may also produce the desired result based on your qualifications.
Some debt consolidation alternatives include
Credit Counselling: in cases where you feel that your qualifications do not meet the basic requirements for debt consolidation, you may want to consider credit counseling as an alternative. Instead of one single loan that liquidates the others, a credit counselor is all that is required. Credit counseling is another type of consolidating but this time, no loan is required.
- The first step is for a credit counselor to analyze your finances and debts to device the perfect plan to solve it
- After analyzing, the credit counselor will discuss other options available in terms of debt relief
- Should you opt for debt management, the counselor will present the fees and processes involved
- Consequent upon your agreement to use debt management, a debt management plan will be created to enumerate your proposed monthly payment scheme.
- Low payments are allowed because the counselor prolongs your period of payment
- After an agreement has been reached and approval has been obtained, the total monthly payment will be sent to the counselor who takes care of ensuring that every creditor receives what’s due
One major benefit of credit counseling is that no credit score or collateral is required. For this debt relief system to work flawlessly, a reliable and top-notch credit counseling agency is required to assist you. Lower interest rates are generally not assured but the counselor strives to achieve the best possible rate.
In cases where debt consolidation is deemed unfit due to insufficient monthly income, the best alternative is debt settlement. This method has several benefits and most times, it is considered as the natural replacement of the former.
How debt settlement works is that a representative negotiating on your behalf or yourself proposes an offer to the creditor to settle the debt for less than the actual amount. For instance, if the total sum owed is 15,000 dollars, you may offer a lump sum of 10,000 dollars to a creditor.
If the offer is met with acceptance, the payment is made and the debt is off. This is applicable to other creditors if the debtor owes more than one debt. Some other things you should know includes
- Debt settlement is most suitable for unsecured debts like medical bills, personal loans, and credit card debts
- It requires a deliberate default to aid your course in explaining to your creditor that you are experiencing financial hardship
- The default affects your credit score but allows you to save a settlement fund to liquidate the debt
- The settlement fund will be used to negotiate the debt and the process begins by offering a lower amount than what is owed
- Upon acceptance by the creditor, a document that states forgiveness of the debt balance must be issued
The process is quite stressful and it is advisable to hire a professional to hold negotiations on your behalf. Just like credit counseling, searching for a qualified and reputable agency to assist you is key.
This is typically offered by a credit card company but it is often limited to consumers with an excellent credit score. For a customer to qualify for a balance transfer, the credit score must be in the region of 700. There is a transfer fee involved, usually between 2-3 percent of the total amount transferred.
These are usually offered by credit unions, banks as well as online lenders. The interest rates vary based on the lender but they are usually fixed lower than what is being paid on credit cards. Personal loans often include an origination fee and some also include a prepayment penalty.
In some cases, other collateral like a car, a house or a retirement fund may be required. Obtaining a personal loan with a low credit score may however be difficult especially if your debt doesn’t measure in favor of your income.
With America owing over 13.54 trillion dollars in household debt as at February 2019, that’s one-fourth of the entire nation’s income. An average American owes about 38,000 dollars personal debt and this has led to borrowers seeking debt reliefs.
Debt consolidation remains the most popular panacea to weighty financial obligations but there are other attractive alternatives that are just as good.