When you're neck-deep in debt with credit card bills, medical fees, and auto loans to pay off - it can be hard to stay true to your financial goals. You're probably looking for a breather and may have heard about different means of dealing with debt - such as refinancing, transferring, or debt consolidation.
Most financial experts agree that debt consolidation is rather effective at dealing with crushing debt - especially if a person has several lines of credit cards. Imagine having to remember a dozen or so payments at the end of every month - now, who has the multi-tasking ability to deal with this type of situation? Debt consolidation works by rolling up all of that debt into a single monthly payment.
Debt consolidation is even more effective if you're able to get a lower interest rate. In fact, many lenders are more than happy to provide loans for people with a bad credit history. Most of these loans are issued near-instantly and get up to $5,000. For what it's worth, the comparatively low interest rate (and the fact that you're now dealing with a single payment) is enough to win the confidence of most people.
However, before going through with the application - you should know a few things about debt consolidation.
· Most lenders provide lower monthly payments in exchange for a longer repayment term. This means you're in debt for longer - and that's just as bad. Try to find an offer that lowers both interest payments and repayment terms.
· Moreover, a lower interest rate isn't always guaranteed after debt consolidation. If the debt is based on a variable interest rate, you may end up getting a higher interest rate debt. And that's always a bad idea.
· Some lenders often take crushingly high fees for processing a loan - they'll invent various terms to make money off you, whether it's a balance transfer, closing costs, or set up fees. If the processing fees are huge, then what's the point of getting the loan in the first place?
· Don't confuse debt consolidation with debt elimination - the debt's form may have changed, but it's still pretty much there.
· Don't confuse debt consolidation with debt settlement (the latter often does more damage than good if you don't go to a reputable lender).
Applying for debt consolidation is often simple and usually done over the internet. Here's how it typically works:
• You fill the online application.
• The lender goes over your information and sees if you qualify.
• Depending on the loan amount, the lender may ask for a ton of documentation about your debt, identity, finances, insurances, and more.
• They will approve or reject your application.
· You may or may not get the loan. In most cases, the lender will pay your debt off and now you'll be in debt to them. Some lenders will simply give you another line of credit, and you'll have to be responsible when making the payments.
In most cases, debt consolidation is a good strategy if:
• The interest rate is manageable (bonus points if it is fixed)
• The new interest rate is lower than the one with your current debt
• The repayment period isn't considerably longer than your current debts
• You will be motivated to keep up with the monthly payments because there is only one payment to have to worry about
In most cases, a personal loan should suffice as an effective debt consolidation strategy. This type of loan has no collateral, which means it is unsecured by property so the lender won't be able to seize your assets. Since the lender has a higher risk, they will most likely charge a relatively high-interest rate (not that much higher, though).
It's also worth noting that your interest rate is dependent on a number of factors, from your debt-to-income ratio to your credit score and payment habits.
Will You Be In Debt Longer?
In many cases, the lower interest rate is a tradeoff for a higher repayment term - this means you'll be in debt longer and will possibly pay a lot to your lender during the course of the term. Some companies deliberately go after holiday shoppers who don't read between the lines. Make sure you do your homework and check the interest rate. If it's variable, it mostly means that you'll be on the hook for higher payments than your current situation. It isn't uncommon for some companies to inflate the interest rate over time and leave you with even more debt.