What to Know When Considering Debt Consolidation

If you are one of the many people who are facing a daunting uphill struggle to keep ahead of your monthly bills, you may have considered debt consolidation as a possible relief to your financial situation. But is debt consolidation the right choice for you?

Here is what you need to know about finding financial relief through debt consolidation

Debt Consolidation: Pros and Cons

While credit cards seem like a great way to gain some wiggle room in a solid financial plan, they often spell trouble for consumers. On average, each American family has e credit cards and a little over $5000 of credit card debt.

After including the monthly costs of utility bills, tuition fees, rent, etc., getting ahead of these debts can feel almost impossible. Once you find yourself making minimum payments, you can bet your situation will not be getting much better unless decisive action is taken.

So, many people look to debt consolidation to relieve some of the financial pressure. But is this a good idea? Well, it can be. But first it will be important to look at the advantages and disadvantages of this financial plan.

Advantages of Debt Consolidation

  • Simplify the Process

    Rather than keep track of several different payments to different lenders, debt consolidation allows you to make a single payment to a single lender on a single deadline — simple enough!

  • Lower Interest Rates

    Once you begin to fall behind on payments, the credit card company can bump your interest rates upwards as high as 25% or 30%, sometimes higher. But consolidating your debt into one loan can mean interest rates between 8% and 15%.

  • Improve your Credit Score

    Paying off all your debts in one fell swoop can improve your credit score. Of course, you will have to rethink the way you have been using your credit cards.

Disadvantages of Debt Consolidation

  • No Reduction in your Debt

    As you probably figured, your debt is not getting any smaller. You may feel you have a slight advantage (and you do) but if you don’t change your spending patterns, you could land in the same problem again.

  • Credit Score

    If you hope to gain the full advantages of debt consolidation, you will need a good credit score at the very least. If you have bad credit, you may find you will be facing the same credit scores you had already been facing. Or, the lender may simply deny your consolidation.

  • Time Consuming Process

    You will need to commit to a process of careful financial spending to eliminate this debt. The process can take between 3 – 5 years depending on the debts you have accrued.

Types of Debt Consolidation

If you believe that you can commit to a plan for debt consolidation, you will then need to consider which type of plan suits you best. Here is what you should know about the four major types of debt consolidation:

Debt management plan (DMP)

This is a good option as you will work with credit counselors to understand more about what causes financial problems so you can avoid them in the future. The solutions provided can benefit you even after you have completed the consolidation. On the downside, this can take up to 5 years to complete.

Balance transfer on credit cards

If you have an excellent credit score and don’t mind paying a transfer fee of around 2% – 3%, many credit card companies offer 0% balance transfers. This is one of the most attractive options for those considering debt consolidation, but you will have to work in a specific time-frame, usually 12 – 18 months.

Personal loan options

Various financial institutions still offer personal loans to consolidate debts. These are nice because they offer fixed interest rates, but they often include a variety of fees and sometimes a penalty payment. You will probably need to offer collateral for this plan and it could also be difficult to find a good loan if your credit score is poor to mediocre.

Home Equity Loans

With this option you will enjoy considerably reduced interest rates. There will be application fees and closing costs involved. Furthermore, you will be putting your home on the line if you are unable to make payments.

Final Notes on Debt Relief Consolidation

When weighing your options, you will want to tally the total cost of consolidation for any of the plans mentioned above. Then, consider how long it will take to clear the debt and what your credit score will look like at the end. By comparing these important points, you will have a better idea of what plan will work best for you.