Credit cards have made financial transactions a lot easier. Well, every positive comes with a negative. Plastic money is no exception. As we all know, with freedom comes responsibility. Credit cards indeed give us the freedom to spend more than what we can afford. Hence, the responsibility of controlling the usage of credit cards is in our hands. A failure in this might result in debt, and if you own multiple cards, then the situation becomes more challenging.
Managing multiple credit card debts is quite a painful task. It involves keeping track of multiple due dates, paying separate monthly payments, etc. Opting for debt consolidation options might help you in managing your debts by converting multiple monthly payments into a single monthly payment.
1.What is Debt Consolidation
In simpler terms, debt consolidation involves combining all the debts (medical bills, student loans and credit card bills) and making a single monthly payment against it. Debt consolidation not only helps the borrower in easy and faster pay off debts but also saves money that the borrower had to pay to various lenders in terms of the interest. It simplifies finances and reduces stress levels.
If the pile of your pending bills is increasing every month and you are not able to find any solution for it, then maybe the time has come to go for debt consolidation. No doubt that debt consolidation will solve most of your debt-related issues, but the process of getting debt consolidation in itself has its own complications. Different debt consolidation methods have different eligibility criteria. Most of them even involve a thorough credit checking. In addition to this, some debt consolidation options may even have a negative effect on your credit score. Hence, it advisable to learn about the pros and cons of various debt consolidation options. This you can do either by yourself or by taking the help of some financial experts like "Snap finance."
Here are some of the most popular debt consolidation options. You can select one that suits your needs and requirements.
2.Debt Consolidation Options:
a. Home equity loan
If you have a house of your own, then you are very much eligible for applying for a home equity loan. Home equity is calculated by finding the difference between the appraised value of the house against the amount owed on the mortgage. If you have a good credit history and your house has enough home equity, then you can borrow a loan against some part of your home equity. You can use this loan to pay off your debt. It is advisable to clear a debt that has the highest interest rate. In most cases, it is credit cards.
Home equity loans are secured loans. Hence, they have lower interest rates as compared to personal loans or credit cards.
The loan amount is generally higher as compared to the limit of credit cards or a personal loan.
These loans generally have a fixed interest rate as well as a fixed monthly installment. This makes financial planning easier.
The repayment period for these loans ranges from 5-30 years. This gives the borrower enough time to repay the loan.
In these loans, the property acts as a guarantee for your loan. Hence, any default in payments on your side gives the lender a right to begin foreclosure proceedings. In extreme cases, you may even lose your home.
b. Personal Loans for Consolidation
Another debt consolidation option is taking a personal loan. You can consolidate all your debts and get a personal loan against that amount. This way, you can clear your consolidated debts. However, you have to repay your loan. So instead of making multiple payments, you just have to make a single payment i.e., personal loan payment.
Lower rate of interest than credit cards, if the borrower has a good credit score.
Flexible repayment options.
Many lenders have prequalification options. This allows the applicant to check various options available that, too, without hampering credit score.
Many lenders even give the option to make the payment directly to the creditors. This way, the loan amount can be used only for clearing the debts.
Easy availability. In the case of personal loans, numerous options are available in the market. For example, traditional and online banks, peer to peer lenders, online nonbank lenders, etc.
The loan approval process takes around one to a few days.
The eligibility criterion is quite difficult. An applicant with bad credit history either may not be eligible or can get a loan at the rate of interest, which is somewhat similar to that of the applicant's credit card.
Many personal loan creditors even charge a very high penalty fee and origination fee.
c. Credit Card Balance Transfers
In this, you can transfer your consolidated credit card debts to another credit card. The best credit card balance transfer is the one that charges a 0% or a very low-interest rate for a certain period.
Faster and easier as compared to a bank loan.
If the borrower pays off the balance before the introductory period, he/she does not have to pay any interest on the amount transferred.
Collateral is not required to qualify for the credit balance transfer.
Limited introductory period. If the borrower fails to clear off the payment within the given timeframe, then the regular interest is charged on the remaining balance.
Many cards charge a fee (3%-5%) for a balance transfer. The amount of the consolidated debt, together with the fee, may exceed your credit card limit. As a result, you may not have enough credit limit to pay off all your pending payments.
Credit card balance transfer cannot take place between the cards of the same credit card company. Applying for a new card can lower your credit score.
Timely payment is very important. Late payment or non-payment may result in the canceling of the introductory period.
d. Peer-to-peer loan
To clear off your debts, you can even apply for a peer-to-peer loan. Being unsecured, loan terms like rate of interest, amount, time period, etc. depends a lot on the borrower's credit history. Higher the credit score, the more borrowing limit, and lower interest.
A good option for those who have tainted credit.
The processing is done online. Hence the loan processing is very fast. If the application is up-to-date and the applicant fulfills the eligibility criterion, the loan amount gets transferred on the same day.
Higher rate of interest as compared to home equity loans.
The repayment period is lesser as compared to that of credit cards.
In case of bad credit, the lender may charge an interest rate of around 35% on the loan amount.
Many lenders charge an origination fee, and it is deducted from the loan amount.
e. Debt management plan
If you are looking to pay off your consolidated debts without taking another loan or credit transfer, then, the Debt management plan is the right option for you. You need to contact a non-profitable credit counseling organization. These organizations would help you in managing your finances and repaying the debts.
A credit counseling organization would negotiate with your creditors for time rebate, fees waiver, lowering the interest rate, or reducing the original debt amount.
The borrower just needs to make a single payment to the credit counseling company's account. The company then uses the money to make payments to your creditors.
You might not be able to apply for a new loan or a new credit card until the program ends.
Some credit counseling companies charge a fee for their services.
Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax debt relief and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.
Published by Matthew Piggot