To start with the basics, ‘debt consolidation’ means to group or consolidate different debts into a single debt; For example, if you have accumulated considerable debt on three or four credit cards at the same time, debt consolidation can be used to combine the lump sum into one large loan; effectively, the new loan taken is therefore the sum of all the loans together.
For someone overwhelmed with responsibility, this can be a good option to accumulate multiple debts into a single monthly payment to make the debt easier to manage. However, it is better to stop and consider whether debt consolidation is the right solution to manage your debts. Sure, it’s a way to get “debt free” faster, but only if you maintain a disciplined approach to paying off and don’t rack up more credit card debt. A large percentage of people who attempt debt consolidation end up accumulating new debt; therefore, the validity of the point is very crucial.
There are several types of loans available: credit card balance transfer, mortgage refinance with cash withdrawal, unsecured personal loans, etc. The exact type of loan that fits your need depends on your current income and overall debt factors.
• High credit card debt with high interest rates: An unsecured personal loan or credit card balance transfer options are helpful.
• Homeowners can take advantage of home equity or cash-out refinancing options.
Here, the advantages and disadvantages of some aspects of debt consolidation should be pointed out. Let’s take a look at balance transfers.
Advantages
• Low Interest Rate on Balance Transfers: The average introductory rate is around 2.5%.
• Initial processing fees are low
• The application and approval process is fast.
• Only one account to be monitored
Disadvantages
• Poor credit scores may affect application of the introductory rate.
• Interest rates on late payments can be very high; higher even than the rates of the debt accounts that were closed.
• The introductory interest rate may increase after a specified time
Debt consolidation vs. debt management
Debt consolidation involves making use of new credit in the form of loans to pay off debts; Debt management is the process of negotiating with lenders to come up with affordable repayments.
Both lead to debt reduction, but the two are completely different methods; only an experienced financial adviser can advise you on the option to choose to manage and consolidate debts.
Sometimes the accountability process is not what it appears to be. For example, a credit counseling company’s liability management program means that you pay one fee to the agency, which in turn pays all creditors. However, the agency does not pay the debt itself, so in essence, it is not really a debt consolidation loan.