What You Need to Know About Debt Consolidation
Debts can be difficult to manage and there are cases where you may have a hard time paying off your loan. When minimum monthly payments wouldn’t work and when you are already in deep trouble paying your loans in time, you might think debt consolidation is the best choice.
Is it really the case?
The promise of paying lower interest rates and easy payment makes people believe that it is the best option. But the truth of the matter is that not all debt consolidation companies can actually help you in settling multiple debts. There have been a lot of cases where things might end up getting worst especially if you fall prey to shady operators.
Facts About Debt Consolidation
So you have a credit card debt or a loan to pay before you finally decide to get debt consolidation, you need to know what this is all about. Here are some of the essential things that you need to know.
- Debt consolidation is basically a loan that is refinanced to give you extended repayment terms. You will have to shoulder additional costs and other charges.
- Since your repayment terms are extended, your debt is also made longer.
- There is no 100% guarantee that you will have a lower interest rate in case you want to consolidate your debt.
- Debt consolidation is not debt elimination. You still need to pay the full amount of the loan plus the other associated and additional costs.
- Debt consolidation and debt settlement are both different things.
Using Credit Cards in Debt Consolidation
Some may use their credit card in order to consolidate debt. It is actually possible. But is this a wise choice? It actually depends on your current financial situation. Here are the things that you need to know when using your credit card to consolidate your debt.
- You have to pay the balance transfer fee. Depending on the lender and the specific amount that you will have to transfer, the rate is usually 3% which can be a big amount. Let’s say you are going to transfer about $3,000, then you need to pay $90 upfront.
- Most would advertise that the introductory rate is super low o to some extent, even 0. But you need to be careful because this is only for a certain period of time. Credit card companies know exactly how to use these promotions in order to encourage people to borrow money and transfer debts to the company.
The low-interest rates are only for a short period of time. After which, you will be surprised because the interest rates are now much higher which only means that the cost of your debt is much more. If you fail to make the necessary payments, you may have to pay a high-interest rate.
Should You Do Debt Consolidation?
Every person varies when it comes to circumstances and financial capacity to pay. In general, if you have other alternatives, it is not strongly recommended that you consolidate your debt. However, when you do it right, you can actually reduce your debt.
We give you effective ways on how you can significantly reduce your debt through debt consolidation:
- When experiencing troubles in paying off the loan, you need to find ways how you can renegotiate in such a way that you will be able to pay the loan without having to shoulder hefty costs. It is very important that you can negotiate terms so you can save and pay off your loan.
- It is best to have shorter payment terms and at the same time low-interest rates. If you are given a chance to have a lower interest rate, it is best to shorten the term of payment. You might think that having a low-interest rate is enough. But this is not always the case.
- If you have the option to have a lump sum payment, you can shorten the terms of your payment. As a result, you can have low interest. Even if let’s say the interest rate is not lowered, the total amount can still be reduced.
- Another option is for you to finally settle the debts. This is the best way to reduce the amount that you owe. If are willing to settle your debts, you can negotiate in such a way that you will only pay a certain portion of the amount and the rest is just forgiven.
Other Options Available
For any borrower, the end goal is to completely pay off the debt. If your situation does not really need for a debt consolidation, there are actually other options available. Although there is no one size fits all approach, you may want to consider these options as one of these might be the best choice.
Car Title Loan: If you have a vehicle and you really need money to pay off your loan just so to avoid surging interest rates, you can actually apply for a car title loan. With this kind of loan, you just need your car as a collateral. The process is quite fast and easy. You just have to submit an application form along with the required IDs and your car’s clear title.
Payday Loan: This may not be one of the best options out there. But if you have a steady income and you just need to pay off your credit in such a way that it won’t balloon to an amount will be difficult for you to pay. Again, this is just one alternative. However, if you already have so many debts and you can no longer handle paying them on time, this is not the best choice.
File for bankruptcy: Businesses file for bankruptcy and so are individuals. There’s just a point in one’s life when they can no longer pay their debt. You can actually file for bankruptcy. You might think that this is the easiest way out. Then again, if you will consider the long-term effect, this is not good for your credit history.
Choosing a Debt Consolidator
If ever you feel that debt consolidation is the best choice for you, it is crucial for you to find a debt consolidator. With the help of your consolidator, your goal is to manage your debt so eventually, you can pay for it.
Here are some essential tips for selecting a debt consolidator:
- Know your debt consolidation options.
Before you even start searching for a reputable agency, you need to understand your debt consolidation options. There are actually two different categories. First is debt consolidation and the second category is a debt settlement program.
These two categories are different in the sense that a debt management company will notify your creditor and will try to bargain for a debt concession like for instance waiving the fees associated with late payments. You pay a monthly payment to the company and then they pay to all of your creditors. On the other hand, debt settlement is when the lender agrees to settle your debt even if the less than the total amount of your debt.
- Know more about debt agencies.
When you search for debt consolidation alone, you find yourself going through several companies promising your lower interest rates. Although this may sound really appealing, you wouldn’t want to fall into a bait. There are so many scrupulous operators who will entice you with good offers by saying that they can repair your credit.
The very first that you need to make sure is that the agency is legitimate. Verify their status. It should be a non-profit agency. Why should you go for non-profit agencies? They are considered more reliable since they won’t take advantage when they know they wouldn’t get any profit. It is very important that you check if the agency is indeed registered as nonprofit.
Another reason is that you wouldn’t want to deal with agencies that offer debt consolidation loans. If you already have a lot of loans, what happens is you get more deep in credits until such a time that you are no longer able to pay your loans.
- Check the accreditations.
When you look for a debt consolidator, you can have so many shade operators who have professional looking websites. You might think that they are legit and reliable. But if you really want to make sure you are in good hands, it is very important that you check their accreditations. In credit counseling, there are two trade associations which include the Financial Counseling Association of America and the National Foundation for Credit Counseling.
If the agency is accredited to these trade associations, then you can at least be sure that it is legitimate.
- Check the BBB rating.
Any business that is reputable and in good standing has good BBB or Better Business Bureau. Why is there a need to check the BBB rating? This is very important as BBB has standards for business practices. A positive rating indicates that the business abides by the standards. If there are complaints, then the business will have a negative rating.
You also need to check their state license. Most states require debt consolidation agencies to have a license before they can operate. Search as to what kind of license is needed. You may also want to contact the government body in charge of it.
- Ask about the fees.
In any financial dealings, you should always ask about the fees. If the agency is charging you exorbitant fees, then you should know that this is not the one you are looking for. A reputable debt management agency wouldn’t do that. In fact, there are agencies that offer free counseling. But it is also important to note that debt management comes with a set-up fee where you have to pay a small amount ranging from $0 to $75.
Unsecured debts will always cause uncertainty and problem. But if you are really committed to paying off your loan and managing your finances well, there will always be alternatives. If you know how to manage your finance, you can settle your debts and have financial freedom. It will take time, but it is definitely doable.