Eliminating debt is a goal that many people strive for, but it can be challenging to achieve, especially if you have multiple debts with high-interest rates.
A debt consolidation loan is a popular option that allows you to combine your debts into one loan with a lower interest rate. While a debt consolidation loan can be beneficial in many ways, it also has its drawbacks. In this article, we’ll explore the pros and cons of using a debt consolidation loan to eliminate debt.
Benefits Of Debt Consolidation:
- Simplifies your monthly payments – no more paying multiple lenders and risking the chance that you miss a payment.
- Lowers your interest rate – Debt consolidation loans typically have lower interest rates than credit cards and other types of loans. This can save you money on interest charges over time, making it easier to pay off your debt.
- Provides a fixed monthly payment – Debt consolidation loans often come with a fixed payment plan, which means you’ll know exactly how much you need to pay each month. This can make it easier to budget and plan for your future expenses.
- Stops annoying collection agency calls – By getting a debt consolidation loan, you can put a stop to harassing bill collectors. Collection calls are a big cause of financial stress.
Financial Tools You Can Use To Consolidate Your Debt
Debt Consolidation Loan
These loans are used to combine all your debts. However, choosing the right company is essential. Not all companies work the same way. Make sure you understand their process, fees, and what your total payback will be before you sign a contract. Remember, some companies will require that you close the accounts included in your debt consolidation.
And even though a debt consolidation loan can reduce your monthly payments, it will usually also extend the time you are making those payments. If you don’t shop around, you may end up spending a lot more than what you originally owed.
One last thought. Debt consolidation loans tend to require that you have good credit. If you have bad credit, you need to shop for a company that will work with bad credit. But debt consolidation companies that work with bad credit tend to have a lot of fees.
Credit Card Balance Transfer
Another way to consolidate debt is by using a credit card balance transfer. Some would probably think that getting a new credit card is not a very wise move when faced with mounting credit card debt. This can be true in some cases, but as they say “There is always an exception to the rule”.
The balance from one credit card is literally transferred to another credit card with better terms and lower or zero interest rates. Keep in mind that the reason why you are opening a new credit card is to actually save money. There are cases wherein some individuals open a new credit card, but slack off on repayment. The result is that they end up paying more.
If you can’t get approved for a new card, call your credit card companies and see if they can offer you a lower interest rate and an increase in your credit limit.
If they lower the interest rate, great! If they increase your credit limit move some of the high-interest debt from other cards to this one.
Home Equity Loan or Home Equity Line of Credit
Home equity loans and home equity lines of credit are almost the same because they are both loans that allow a borrower to use the equity of their home as collateral and pay back the loan over a period of time.
The difference is that a home equity line of credit gives the borrower the option to borrow money as needed. They don’t need to take all the money at one time.
Remember that the interest rate on a HELOC (home equity line of credit) is variable. Since the interest rate is generally based on the prime rate, it can change over time.
While with a home equity loan, much like with a regular loan, you get all the money upfront. And you pay a fixed amount for it each month. When you take out this type of loan, make sure you know the exact amount you need to pay off your high-interest debt.
This means calling the credit cards and loan companies that you want to pay off and getting in writing a payoff amount. This amount will be good for a set amount of time. They will give you a payoff over the phone, but I’ve found its easier to have everything in writing, that way no mistakes get made.
Things to Remember About Debt Consolidation
Before you proceed consolidating your debts, weigh every possible option given to you. Make sure that you understand the pros and cons associated with each debt consolidation method.
The most important thing to keep in mind is to repay the loans on time. Debt consolidation is actually very effective if you know how you can make it work to your advantage.
Related Article: Credit Card Consolidation Mistakes To Avoid