Debt consolidation is helpful to pay what you owe to your lenders, conveniently and swiftly. Debt consolidation services can navigate you back on track, and help you in eventually improving your credit scores. However, you will need to understand debt consolidation first, and how to select the best way to get out of your tight financial spot.
Learn the Terms First
Debt consolidation – It means you are replacing many small debts with a single large one, or taking a single big loan to repay multiple loans. Ideally, you get to pay less interest, and clear off your debt more quickly.
You will need to consult a credit counselor for negotiating with some major credit card companies, and for sketching a plan of repaying your debts, at low rates. The payment will be made to your counselor, who in turn, distributes it among credit card issuers.
Debt settlement – It is a way to get creditors accept small amounts that you actually owe. Lenders agree to such settlement at times, because they feel that you may file for the bankruptcy. Debt settlement hits your credit score, as well as leaves you open to lawsuits. It is better to file bankruptcy than go for debt settlement.
Recognize your options
Low-rate Credit Card
Consumers can consolidate credit cards on a single card. If your credit is straight, you can apply for new card with lower interest. Interest rates fluctuate, so you will need to look for the duration provided. Piling of huge balance on a single card damages the credit score, but the scores recover when your loan balance drops.
This option can help you settle the debt with flat rates and fixed installments to be paid over a period of 3 to 7 years. However, you will need a good credit score, because there is no property or collateral involved. Better credit scores enable you to get low interest rates. Even though you get low rates now, you can end up paying more, if you decide to extend the duration of payback.
Loans secured on cars or paychecks come with high interest rates, and difficult terms. Alternatively, home loans are risky, because if you are unable to make payments, you will lose it. Also, you eliminate the possibility of filing bankruptcy because the debt is secured by the property.
Retirement Plan Loan
Any kind of loans on retirement plans do not need credit checks, but can be risky. If you get unemployed and are unable to pay the balance, then your loan turns to be a withdrawal and also sources heavy tax bills. It is wise to leave retirement nest alone for your future.
Understand your situation, different options available, and shop smartly for lenders. Several consumers consider debt consolidation, but if any of the aspects mentioned below are true, then look somewhere else.
Debt consolidation is not an option in the following scenario
- Bad credit
- Debt is more than half of your income
- You have been sued over the debts
If you find that consolidation is a good way out, then first find out why you overspent. If this issue does not get solved, then your old debts will pile up even more. It is sensible to create a budget, eliminate unnecessary expenses, and make consistent payments of the debts.