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What you need to know about consolidating debt and if it’s the right move for you

For those who are in debt the burden of debt as well as an astronomical annual percentage rate (APR) can be combined in the most disastrous manner, usually resulting in the cycle of high-interest that consumers are unable to escape. Even those who are able to manage regular payments, excessive credit card debt could prevent their financial goals, such as saving for the future — debt consolidation.

In any case it’s the chance to pay off the burden of credit card bills that’s less threatening than bankruptcy. All you need is determined to make a plan and adhere to it till you’ve become debt free. If you’re looking to get rid of debt permanently then read this article to find out the ways debt consolidation can benefit you.

What is the process of debt consolidation?

If you’ve tried budgeting to get to get out of debt or making more money, but it’s not working and you’re looking for a solution, debt consolidation may be the solution you’ve been searching for. Through debt consolidation it is basically a way to exchange your credit card and loan balances that you have to one new loan product that has higher rates and better conditions, which could result in lowering your monthly installments or allowing you to allocate more money towards an increase in the principal amount of the debt or both.

In essence, when you do the debt consolidation process option, you get an additional loan and utilize the funds from that loan for the repayment of of your debts, and pay your monthly installments only on the loan you have taken out. In general there are three types of consumer-friendly financial products for debt consolidation:

  • The debt consolidation loan Also known as personal loans, permit you to convert existing debts to a new loan that has an agreed-upon interest rate and the same repayment period.
  • Balance credit cards that transfer permit you to consolidate debt onto an additional credit card that provides APR at 0% for a period of time.
  • Equity loans for home owners will allow you to consolidate debt into a product of loan that can be secured with the worth that your house has.

Whatever product you choose to choose, you must keep in mind that debt consolidation only can be effective if you are able to stop piling up additional debt. In the event that you are consolidating debt through the aid of a personal loan or account that allows balance transfers, and you are still charging for more purchases to different credit lines the debt consolidation process is an unnecessary expense.

Is debt consolidation a good idea?

Debt consolidation could or might not be an option. It’s all based on the level of commitment you have to the processand if you’re disciplined enough to stick with it.

In a hypothetical example, imagine that you have $5,525 credit card debt with 19% APR. In this case you would be able to make a payment of $100 per month towards this debt for 133 month (or more than 11 years before you pay it off. Over the course of that time you’d pay $7,701 of interest.

What if you combined the debt of $5,525 into one personal loan? Although personal loans differ, the majority allow you to borrow money between 2 and 7 years. Personal loans are also available with fixed rates of interest as well as fixed repayment terms. fixed monthly installments.

In this case there is a chance that you might be eligible for a 60-month personal loan that has an annual interest charge of 7.7%. In this scenario you’d pay off your loan with each month a payment of $109 over the duration of five months (60 months). In that period you’d pay around $1,039 in interest. This is a huge savings of more than $6,000.

It is also possible to consolidate debt by using credit cards. It is important to remember that even though credit cards that allow balance transfers offer an initial 0% APR for transferred balances however, the maximum time period offered currently is 21 months. After this, the interest rate will be reverted to the normal APR, which will remain at the top of the range.

This is why the balance transfer option on a credit card is only an option for those with a significant amount of debt you are able to pay off within the initial period. If you require more time to bring rid of debt than the balance transfer can provide it, then you might want to look into an individual loan instead.

In addition, you can reduce debt using an equity loan for your home that utilizes your home as collateral. In many instances this is beneficial as home equity loans offer low fixed rates and also an annual fixed payment and a the option of a fixed repayment time. Be aware that you must have excellent credit score to qualify for a home equity loan and you could lose your home if you fail to pay.

However, in one of these situations when you consolidate your credit card debts, you spend more and end up with an additional $5,000 of debt on the credit card you were using previously and you are able to only pay $100 per month in payments on the debt and you end up paying an additional $4,985 interest. Add that to the additional debt of $5,000 and you’ll be in worse shape than you were when you first started. It’s the reason it’s important to be disciplined and avoid increase your spending beyond what you can afford when you consider an option to consolidate debt.

Alternatives to debt consolidation

There are other options for debt consolidation you may think about, and some provide assistance from third-party firms. For instance, you might think about applying for a debt management program (DMP) that is in which a credit repair service can help you negotiate interest rates and settle your debts over a set duration of time.

It is important to note that DMPs aren’t suitable for everyone and that credit repair companies that provide DMPs aren’t able to do anything you wouldn’t be able to handle for yourself. In addition, some credit repair firms have had bad reviews So, make sure to take your time researching before taking this route.

Another option is debt settlement that is a method which helps you reduce your debts by paying less than what you are owed. It is important to be aware that debt settlement companies will request that you stop paying your debts while they negotiate to settle your debts on behalf of you. It’s not surprising that this could result in significant damage in your credit report which can be a long-term issue.