Are you struggling with your too many debts? Your credit cards maxed out? Do you find it hard to keep track of the principal and interest payments of your debts?
Then maybe it is time for you to consolidate your debts.
Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off your other high-interest consumer loans. These loans could be credit card bills, medical bills, payday loans or student loans.
What Are the Things That You Should Know about Debt Consolidation?
This process entails borrowing from one lender and using the proceeds of such loan to liquidate your other debts. The result is that you will then have to make payments to a single lender, rather than making multiple payments to multiple lenders.
Can You Benefit From Debt Consolidation?
Experts say, when this is done correctly, debt consolidation can bring you the several advantages. Consolidation of multiple debts can lower your interest rates, lower your monthly payments and protect your credit score.
Your debt becomes more manageable. As such, debt consolidation can actually help you settle your debts faster. From which financial institutions can you get consolidation loans? Well, banks and credit unions are good sources of consolidation loans.
If you have a home, you can avail yourself of home equity loans. Home equity loans are available from many lenders at affordable interest rates.
Further, your interest payments are tax deductible. Such allowance for deduction allows you to get tax advantages when you make interest payments on such loans. You have to note however, that your home will be used as security for such loan. Thus, you will have bigger problems later on, in case of default.
If you have a retirement plan, you may borrow from it. Do note that you may have to pay a severe penalty—10 percent or more—if you withdraw funds from your retirement plan before you are normally eligible to do so.
You can also borrow against your life insurance policy. This is possible if your life insurance has a cash surrender value. You can consult your insurance agent for details about this arrangement.
A key point is to make sure that your consolidation loan should reduce your interest rate, lower monthly payments and can give you a way to eliminate debt.
Experts suggest that you initially start with a list of your existing debt, the interest rates on those debts and the monthly payments you make on those debts. Afterwards, you will have to compare these amounts with your new consolidation loan’s rate, fees and length of time.
If you have several credit card debts, one option that you can take is to transfer these debts into a single, zero interest account. However, you can only do this if you have a pretty good credit score—700 and above.
This arrangement will allow you to avoid paying extra interest costs. You may even be able to reduce your monthly payments to affordable and practicable amounts. This way, you will avoid the confusion of having to deal with several due dates in a month. With this, your debt becomes more manageable.
A thing to note though is that the zero interest plan will only last for about six to eighteen months. Within this time, your payments will all be for reducing the principal amount of your debt.
When this period ends, you will be charged interest, 13-27 percent, on the remaining balance. Further, the balance transfers card companies charge transfer fees and in some cases, even annual fees.
If you really want your debt consolidation to work, you have to make a careful analysis of your current debts. You must also analyze the interest and monthly payments that you make at present, and compare them with the future interest and monthly payments of your consolidated debts.
In the end, experts say that it will ultimately depend on you—how determined you are to change your financial condition. If you think debt consolidation might be right for your but aren’t sure, reach out to us. We can give advice on your unique financial situation so that you can take advantage of the solution that’s right for you.
Kevin Fallon McCarthy
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