Debt consolidation allows people to combine several debts into one. People who consolidate debt will not only make it more manageable, but they will also save money. Additionally, they will be able to pay off their debts more quickly. Many people use debt consolidation, but everyone does not benefit from it.
In fact, some people end up in worse shape than they were in before. People often get into credit card debt again. Others are unable to keep up with the payments. The good news is that many people are able to take control of their finances with debt consolidation. Before you get debt consolidation, you will have to think about whether it is really right for you.
There are many ways that you can consolidate your debt. You can get a personal loan, home equity loan or balance transfer. The option that you get is contingent upon your situation.
Do you Need to Consolidate Your Debt?
There are a few questions that you will need to ask yourself before you decide to consolidate your debt.
Consolidation works best if your goal is to be debt-free. You should not consolidate debt just to get a lower interest rate. You will have to make some changes in your lifestyle.
Is my debt manageable?
You should look at your debt and income. Can you realistically pay off your debts within five years? Is your unsecured debt less than half of your gross income? If you answered yes to both of those questions, then debt consolidation is a great option.
If your Debt is Uncontrollable
If you cannot manage your debt or do not see yourself getting out of debt within five years, then you may want to speak to a credit counselor. You may also have to file for bankruptcy. A credit counselor can help you set a budget. They can also help you create a debt management plan.
Filing for bankruptcy can help you get rid of your debt. You may also be able to keep your assets. This will stay on your credit for 10 years. However, it will have less of an effect on your credit as time goes on.
Debt Consolidation Options
A credit card balance transfer allows you to shift all of your credit card debt onto one credit card. A fee is typically charged, but you will not have to pay interest for 12 to 18 months.
You only have to make one credit card payment. You may even be able to transfer non-credit-card debt.
You need a good credit score. You will be charged interest if you cannot pay off the debt within 12 to 18 months.
Home Equity Credit Line
You can take out a home equity credit line if you are a homeowner. The interest rates are typically low. You will have to make interest-only payments for the first 10 years.
The interest rates are low.
This is a type of secured loan. You could lose your home if you do not pay the loan.
Debt Consolidation Loan
You can get a personal loan from a credit union, online lender or bank. Shop around for the best interest rates.
It is easier to work the fixed installment payments into your budget.
A debt consolidation loan is another form of debt.
You are borrowing your own money. It will not show up on your credit report.
You will be charged a penalty, and the unpaid balance may be taxed if you cannot pay off the balance.
Life Insurance Loans
Borrowing money from life insurance is definitely not your best option. It is important to weigh the pros and cons carefully.
There is no deadline. You have the option of not paying back the loan.
The cash value of your policy may be low during the first few years that you have it. If you fail to pay back the loan, then the amount will be deducted from the proceeds that are designated for the beneficiaries. Your policy could collapse, which means there will not be anything to pay out. You may also be charged a tax bill.
No Credit Check Loan/Payday Loan
A payday loan allows you to get funds quickly and does not require a credit check. However, these loans come with extremely high interest rates. You also have to pay the entire loan back when you get your next paycheck.
You will probably end up having to file for bankruptcy if you cannot pay off the loan.