What is Debt Consolidation?
Understanding debt consolidation programs and debt settlement are the first steps in deciding which financial choices will make your life easier. Everyone has an individual set of circumstances related to their personal debt, and many different options are available based on your situation. Comparing debt solutions can be tough, but finding the right option can help you on your road to being debt-free.
There are two popular debt management alternatives for people with significant personal, medical, or credit card debt. These options are “debt consolidation” and “debt relief.” Although both solutions work to help you overcome the debt, each offers different advantages based on your financial needs. We understand that dealing with debt is stressful enough, so we have organized some of the most popular debt consolidation and debt relief strategies that you can utilize to meet your financial goals.
Considering Debt Consolidation?
If you’re considering debt consolidation, there are several different strategies that you can take advantage of. When you use this option, you are able to simplify your payment schedule and get a lower interest rate compared to what you are currently paying.
If you owe more than $5,000 in personal credit card debt spread over numerous credit cards, debt consolidation might make it easier for you to organize your debt into one account so you can make a single payment each month. Often times this reorganization of debt is a relief from the struggle of dealing with multiple credit account payments every month.
Since average interest rates on credit cards can range anywhere between 13%-23%, specific debt consolidation reduction methods could even help you save on interest. Debt consolidation is a debt management strategy where you combine multiple debts into a single payment.
How to Consolidate Debt
There are numerous ways to consolidate credit debt. You consolidate arrears by combining everything into one payment each month.Consolidating your debt can be accomplished through payment to a lender, an additional credit card company, or a third-party debt settlement program:
1. Balance Transfer Cards
Credit card issuers know better than anyone that the average U.S. household owes about $15,654 in personal credit card debt alone, and they have come up with a debt management tactic called a “balance transfer card.” A balance copy card is a high-limit credit card that allows you to combine your existing financial debt into a single line of credit, and provides you a chance to pay it back at a low price over a given period of time.
Yet balance transfer cards may not be the most beneficial deal in the long term. Several balance transfer cards offer costs starting as little as 0% APR intended for 12 months or more. Should you be holding multiple amounts on cards which have high interest, it might be easy to see why you may be lured in by this offer.
This kind of charge can be ranging from 3%-5% of the initial balance. Many stability transfer cards need you to pay a charge for every new personal debt added to the card. So, in the event that you were to transfer a debt of $1,000 onto an balance transfer card, you’ll end up paying your own card issuer $30-$50 merely to get the transfer completed. While this doesn’t seem like a lot of money compared to your debt, imagine how much you would be paying on amounts of $10,000 or higher!
If you don’t pay back your debt by the end of the promotional period, you might end up with near the same amount of personal debt that you had before transferring your balance and consolidating your debt. Various balance transfer credit cards have the same rates of interest like other credit credit cards after the promotional 0% APR period expires. Even worse, after the promotional period ends on a balance copy card, your charge is at the mercy of further modification.
When to Use a Balance Transfer Card for Debt Consolidation
When you have a lot of personal credit card debt and cannot afford to pay it all off within the promotional period, an equilibrium transfer card can land you in a similarly stressful financial situation. If you have several different debt accounts with high rates of interest and are able to off all your existing financial debts within the promotional period, stability transfer cards could be the right debt consolidation/reduction tool for you.
2. Debt Consolidation Loans
Yet one of the most popular methods of debt management is through a consolidation mortgage. Personal loans are very common financial tools nowadays, partially because you are able to use a personal bank loan for almost anything. Working out consolidated debt may be through a personal debt consolidation loan.
Because debt consolidation reduction loans have time frames ranging from 24-72 months, they could help you get out of debt faster than through monthly payments. By simply rolling all of your unsecured debt into a consolidation bank loan, you may be able to make smaller payments or pay your balances off in a shorter period of time.
Debt consolidation reduction loan rates commonly range from 10%-32%, based on your credit profile, debt-to-income ratio, and other elements. These rates will not go up unless you miss your payments. Unlike stability transfer cards, debt consolidation reduction loans are usually fixed-rate loans.
These types of fees can range from 1%-6% of the total loan, but particular loan providers waive this kind of fee entirely. Even though there’s no charge for rolling all of your debt into a debt consolidation reduction loan, some loan consolidations require you to pay a hefty origination fee.
Seeing that different lenders will give you different rates and terms, it’s a good idea to compare your options and find the best offer for your situation regarding a debt consolidation loan. There are two main ways to remove a debt consolidation reduction bank loan. You can either find a loan supplier online, go to your local lender, or contact a credit unification to find a consolidation mortgage loan that fits your requirements.
When to Use a Debt Consolidation Loan
A consolidation loan could help simplify your payment routine and reduce your interest rate, but you may pay larger monthly payments to get debt free in a shorter period of time.
In the event that you took out a debt consolidation reduction loan having a rate of 13% APR, you could be debt-free in 36 months, yet at the cost of $505 every month. 99% APR, it could take you 258 months to repay your personal credit card debt and cost you approximately $450 every month.
However, some people who are struggling with heavy personal credit card debt can’t get a good price for a debt consolidation mortgage loan because of poor credit history and a high debt to profits ratio (DTI). A debt consolidation reduction loan could be worth exploring if you can achieve a lower rate than you’re currently paying on your financial debt, and if the new payments are realistic.
3. Cash-Out Refinance
Simply by refinancing your home mortgage and taking out more income than you owe in your mortgage, you can use the extra cash to combine your debt. Homeowners who require personal debt consolidation can do a cash-out refinance to pay off their existing credit debt at a lower rate and over a longer time period. Then, you just always pay your home loan like you normally would, which now includes your consolidated debts.
A cash-out refinance is actually a type of mortgage, and terms are usually 5, 15, or 30 years long. Since the common 30-year fixed type of loan in 2017 was 3.99%, a cash-out refinance can provide you a considerably lower interest rate compared to the debt you’re looking to pay off.
That is why it’s crucial to make sure you can manage your payments if you decide to make use of this debt consolidation reduction tactic. As your mortgage is attached to your home and is consequently considered a secure debt, your home could possibly be foreclosed on or reclaimed if you are unable to pay your mortgage. Combining debt with a cash-out refinance might seem like an obvious choice, but there are definite risks involved with this debt management technique.
House appraisal, origination costs, and closing fees are still in effect as you refinance—so be prepared to make these expenses prior to consolidating with a cash-out refinance. Keep in mind that a cash-out refinance is a home loan, which means that you may have to pay all of the charges associated with a mortgage if you choose this option.
When to Use a Cash-Out Refi to Consolidate Debt
In the event that you own a home, possess a lot of high-interest credit card debt, and can pay the fees on your new monthly mortgage payment, a cash-out refinance may be the right debt management strategy for you.
If you have a low credit score or your debt-to-income percentage is too high, you might have trouble qualifying for any worthwhile interest rate. For a debt consolidation reduction loan, a part of your new mortgage rate is dependent upon your credit score and debt-to-income ratio (DTI).
Debt Relief Programs
Consequently if you’re dealing with high-interest credit debt due to an economic hardship like job loss, divorce, the death of a family member, medical bills, or because you never learned how personal credit card debt works, a debt relief program could be right for you. Also known as debt negotiation or credit debt resolution, debt settlement programs can be a debt management solution created specifically for people struggling with $10,000 or more in personal, medical, or financial loans, and are having trouble paying it due to unforeseen economic circumstances.
As you work with a debt settlement organization like “Financial Daily Updates,” you choose which of the unsecured debts you need help managing. This sum could be less than you are paying on your creditors each month. These organizations also help establish a given amount of money that will be made as your new monthly payment. Once you get your debts into the Liberty Debt Relief program, you create a dedicated account that you deposit into to manage your newly consolidated debt.
When you are making deposits into the dedicated account every month, Financial Daily Updates makes a strategy for negotiating with your creditors to encourage them to reduce the amount of your debt by as much as possible.
As money is accumulated into your dedicated account, Financial Daily Updates contacts your creditors to work out a lower settlement with them. This technique repeats until all of your debts are resolved. When a settlement is finally determined, you will be asked to accept the settlement after which the funds you have been depositing into the dedicated account are likely processed to your lenders as payment.
Since you choose to prevent paying your creditors for the negotiation method to begin, you could obtain debt collection calls along with your credit being negatively impacted. Debt relief courses like Freedom Debt Negotiation can reduce your debts and help you repay debt faster than through current minimum monthly payments.
Nevertheless, legitimate debt settlement corporations like Financial Daily Updates offer third party legal representation in the event a creditor endeavors to take legal action against you. Selected creditors may even employ legal tactics to get you to pay the full debt amount.
When to Use a Debt Relief Program
Federal student loans, auto loans, and mortgages are not permitted reasons to enroll in any debt settlement program, including Financial Daily Updates. Debt relief applications like Financial Daily Updates are ideal for people carrying $10,000 or more in high-interest personal debt like credit card debt, skilled debt, or personal bank loan debt.
If you are struggling with credit card or personal debt and are having problems making your minimal payments, Financial Daily Updates could help manage and conquer your existing debts.
Are You Eligible for Debt Consolidation?
Mortgage amounts for equilibrium transfer cards and consolidation loans could possibly be around $1,000-$50,000. Debt consolidation loans, harmony transfer cards, and cash-out refinancings have limits on how much you can borrow. To qualify for a cash-out refinance, you need to have value in your home that you can borrow against. If you contain equity in your home, you are only able to finance up to 97% against your home’s current value.
Although you may be eligible for debt consolidation reduction, you may not qualify for a rate that is significantly less than your current bills. If you want to do a cash-out refinance, you could have trouble finding a low rate without a great credit history. If you’re looking at a balance transfer credit card, you may not even meet the criteria unless your credit score is excellent. Many companies that offer consolidation loans advertise ultra-low rates in front of you to help you get in the door, but then offer a less desirable rate if you do not have an excellent FICO score and low debt-to-income.
Can You Afford Debt Consolidation
It may be true that consolidation methods could permit you to pay off the collectors you owe faster, nevertheless they could also cost you far more each month than a debt negotiation program would.
- Debt consolidation loans extend about 24-72 months, so if you combine $5,000 or even more in debt, you could end up paying more every month.
- Of course, if you want to pay off your credit balances within the 12 month promotional period, the monthly payments could be substantial. Balance transfer credit cards only really function if you can pay off your debt during the low APR promotional period.
- Cash-out refinancing may seem just like a better alternative than either of these choices, but you’re nonetheless adding onto the total amount you pay every month for your mortgage, and you’ll end up spending thousands in interest if you spread the mortgage over a 15- or 30-year term.
Debt Consolidation: The Bottom Line
Debt consolidation is most effective if:
- You have exceptional credit and can easily acquire a low rate
- You borrowed between $1,000-$50,000
- You are able to pay off the debt during the term of your debt consolidation reduction loan or the promotional term of the balance transfer card
In the event that you simply roll your personal loan, medical debt, or credit debt into a single account and continue spending the way you used to, you might end up in the same stressful financial situation. Even if you qualify for consolidation, remember that debt consolidation lending options, balance transfer credit cards, and cash-out refinancings are still types of personal debt that need to be paid off.
How to Tell If a Debt Relief Program Is Right for You
Seeing that debt negotiation programs usually do not require you to take out financing, you don’t need an excellent FICO rating or a low personal debt to income percentage to qualify. Unless you qualify or cannot afford to combine debt, your best option might be a debt relief program.
Can You Afford a Debt Relief Program?
It might be even more economical than what you are currently paying on your creditors now. In contrast to debt consolidation, which could require you to pay more every month in order to get out of debt quicker, Financial Daily Updates works with you to find an affordable program that fits into your spending budget each month.
Instead of paying the full debt quantity plus interest, the same way you would with a debt consolidation reduction mortgage, the Freedom Debt Relief system could significantly decrease the amount you owe lenders and help you become free of the debt in as little as 24-48 weeks.
Debt Relief Programs: The Bottom Line
A debt relief program may be the right choice for you if:
- You are experiencing difficulty making minimum amount payments because you have experienced a financial hardship
- You intend to cut down your debt and settle it for less than you owe
- You’re carrying over $10,000 in unsecured personal loans, medical debt, or credit card debt
Subscribe to INQUIRER PLUS to get access to The Philippine Daily Inquirer & other 70+ titles, share up to 5 gadgets, listen to the news, download as early as 4am & share articles on social media. Call 896 6000.