You are nose-deep in debts. You have student loans, automobile loans, and credit card debts to pay off. The minimum payments are just not cutting it anymore. Every month you are incurring more debt just trying to make ends meet. What do you do?
Sadly, this is the present picture of adulthood. The average American citizen juggles at least three debt payments at a time, and credit card debt is one of the costliest of them. Paying off debt to attain financial freedom is next to impossible in such situations. The only way you can salvage your finances is by reducing the net monthly payment, but is that at all possible? Is there a way you can reduce your monthly dues without attracting a penalty and a higher APR?
What is a feasible way out of crippling debt and confounding payments?
Debt consolidation helps people pay off their existing loans and streamline their finances. It refers to a complete collation of all existing smaller debts. Debt consolidation is not synonymous with debt settlement, and it does not involve bargaining with the creditors and loan companies. You can combine your payday loans, medical bills, insurance bills, utility bills, credit card bills and personal creditor payments. It can take a little bit of time and effort since people usually make several payments throughout the month. Combining your debts will help you to lower your net monthly payoff and make it much easier for you to make ends meet.
Here are the top 4 ways people choose to pay off their consolidated debts –
Debt consolidation loans
You can approach debt consolidation company and borrow a sum that covers the total debt amount to pay off the existing creditors. You can then pay the consolidation company in much smaller payments that do not harm your personal finance.
Several banks and credit unions offer consolidation loans. However, you need reliable credit records and a score of at least 600 to qualify for consolidation loans from banks. Since you are already facing trouble making regular payments, it is safe to assume that the credit score is far from perfect. In such cases, you can always try the online debt consolidation companies like nationaldebtrelief.com.
Always remember that you can settle for lower monthly payments by stretching the repayment period. A more extended repayment period means that you will be paying more in interest. Also, pick a company that is ready to offer you lower interest rates. Your ultimate aim is to reduce your monthly payments, and unless your consolidation loan payments are lower than the current net amount, there is no point in switching to a new debt system.
Personal loans are not as easy to get, but you can always use one as a consolidation loan. Getting personal loans from banks can be a little tricky when you already have unpaid dues, especially from similar financial institutions. Not having a good credit score will also decrease your chances of getting a personal loan.
The amount you get from your bank will depend upon your FICO score. Since it is an unsecured loan or a loan without collateral, banks will run a thorough background check on your finances before sanctioning the loan. A bad credit record can attract higher interest rates. Higher interest on personal loans can help you consolidate your loans and pay them off, but it will not help you save money.
Home equity loans
You can use the equity in your home as collateral to take out a loan. You need a decent credit score and the right amount of capital for qualifying. Home equity loans have much lower interest rates, but they have much higher risks. Think of it this way. To pay off your credit card debts and student loans, you are now putting your home at stake.
Your home is probably your first significant investment. You should not risk the foreclosure of your home for a couple of lapsed payments. Using home equity loan as debt consolidation loan is a feasible idea, but it is never advisable. Finance experts always advice against using homes as collaterals for taking out any form of a consolidation loan.
Credit card balance transfers
The first thing you need to know is that there is nothing called a 0% interest credit card! There are low balance transfer rates, but they expire after a few initial months. Within six months to a year, you will be paying full interest. While transferring, ensure that you know about the ongoing rates and the expiration dates of the same. Credit card balance transfer can be costly for those who do not know the way around the finance avenue.
Credit card debt transfer is possible, but you need a card with a large credit limit to hold your credit card debt. However, know that once you transfer the sum, you also accept a blotch on your credit score. Your credit record will take a hit, and it will take at least a good couple of months of regular payment for recovery. As you keep paying the balance, your score will slowly but steadily improve.
Choosing the type of payment is not as difficult as it may seem, especially if you have an expert to help you through the process. Judge your present FICO score, your savings status and the equity in your home before you make a decision. What works for your parents or your best friend might not work for you. Debt consolidation is a personalized solution, and it cannot be the same for everyone. After opting for a debt consolidation loan, remember that it is not a long-term solution to your financial woes. It is just a temporary boost. Think of it as a bridge that can pick you up and carry you across the rapids to a safe zone. However, if you keep spending without measure and keep lapsing your payments, you will again end up in nose deep debt before you know it. Avoid borrowing until you have successfully paid off your loans.