What You Should Know About Debt Consolidation

According to https://www.forbes.com report, Americans paid a whopping $104 billion in credit card interest and fees in a 12-month period. This is hardly surprising since the level of revolving debt; primarily credit card debt has crossed the 2008 peak to touch $1.04 trillion in 2018. While this may be very good news for the credit card industry, it also reveals how utterly dependent Americans are on credit cards and seem to be living only by rolling over balances from one month to another. While there are a number of ways of tackling credit card debt, debt consolidation is easily among the most popular since it does not involve the typically long periods involved in debt management or drastic measures like declaring bankruptcy. (Image Credit: Pixabay)

Debt Consolidation Explained

Debt consolidation is nothing but a process by which, you combine all your credit card dues and other unsecured debts into a single loan. All you have to do is to apply for a debt consolidation loan and use it to pay off all your creditors. The outcome of the exercise is that all your credit cards now have zero balances and you have one loan of the combined amounts to service every month. The benefits of debt consolidation are manifold; you no longer have to monitor multiple credit card statements and remember to make the minimum payments by the scheduled dates. Also, you can replace high-interest credit card debt with a consolidation loan that typically carries a lesser rate of interest; however, the actual rate of interest you will be charged depends on how good your credit score is. You can also use a debt consolidation loan to make the monthly repayment more affordable if you negotiate for an extended repayment period. While banks and credit unions do lend debt consolidation loans, usually, you will find the private finance companies like https://www.nationaldebtreliefprograms.com to be more willing and flexible in their approach.

Methods of Debt Consolidation

While taking on a debt consolidation loan is perhaps the most common method of paying back your existing unsecured debts, there are some other routes that you can examine. If you have substantial equity in your home, you can take a home equity loan; the need for credit check is not there and the interest rate is possibly the lowest you will be able to get, however, you could end up putting your home in jeopardy if you default on the loan repayment. Dipping into your retirement funds is also a possibility but you need to be careful about the tax implications and applicable penalties so, be sure to consult a financial counselor before exercising this option. A balance transfer offer at zero percent is easily the most lucrative in terms of the savings on the interest; however, you have to repay the dues within the promotional period that is typically 12-18 months long.

When Is Debt Consolidation Beneficial?

It is worthwhile to opt for debt consolidation when you are able to achieve at least one of the three main benefits. Consolidating debt will take a lot of stress off you since you no longer have to track multiple debts and make the payments on the different due dates. Thus, even if you don’t achieve too much savings on the interest, it could still be worthwhile to consolidate your debts. However, the biggest benefit of debt consolidation is the potential savings that you can make on the interest expense; however, the extent of the saving depends on how good your credit score is. The final benefit of debt consolidation is the opportunity to negotiate a longer repayment period so that the monthly payment becomes more affordable. However, you need to be careful in not unnecessarily prolonging the period as the total interest paid out will become larger. It is very important to remember that even though you may feel that a big load has been taken off your mind after you have undertaken debt consolidation, you still have the same amount of debt to be repaid as before.

Be Alert to the Possibility of Scams

As with everything in the world of finance, you need to be alert to the possibility of unscrupulous companies trying to take advantage of you. There are many finance companies who will try to lure you with very low rates of interest and then levy a number of fees and other charges that effectively drives up the cost of the loan enormously. You also need to be very careful about what their terms and conditions say as it is not unusual to find very restrictive clauses and high penalties being hidden there. There are also some companies who will ask for fees upfront promising to reduce the amount of the debts, however, you should know that under debt consolidation, the amount of the total debt cannot be reduced. If you have entered into an arrangement with a debt consolidation company to whom you are making a monthly payment, you should check periodically that your creditors are receiving their dues and that the money is not being pocketed by the company.

Make a Budget That Works

Among the biggest reasons of failure of debt consolidation is that most people develop a false sense of security that their debt is under control since their interest expense is lesser and the monthly payment usually lower. Under these circumstances, it is very easy for them to go forth and start swiping their credit cards with abandon once again since there are no dues against them. If they are not careful, it is very easy to clock up a huge amount of debt once again and then have to deal with both the consolidated debt and the fresh card dues. It is critical that after having consolidated your debt, you should hunker down and make a budget according to which you can regulate your spending. It is also very important to maintain financial responsibility and change your lifestyle according to your means.

Conclusion

If you have become trapped by credit card debt, it is very important that you take concrete steps to resolve the issue. Identify the route that is most suitable for you to address your debt problem. If debt consolidation is indeed the most appropriate method, approach it logically. You should consolidate the debts with the highest rate of interest with a loan from a reputed company and clear your dues as fast as possible.

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