Is Debt Consolidation A Good Idea?
Is debt consolidation program a good idea? Not all defaulting debtors missed their monthly minimum payments due to improper planning or carelessness. Sometimes shit happens, and you have to own up to the situation at hand. At this delicate point in time, you have to decide whether debt consolidation is a good idea.
There are various ways to get out of Debt, but debt consolidation is pretty cool, depending on your financial situation.
If your inability to pay your debts is temporary, then, you might consider debt consolidation.
This post will guide you through the decision-making process and enlighten you on the debt consolidation programs available in America. Read more.
Ready For a Quick Quiz?
How Do I Know If Debt Consolidation Is Right for Me?
I get similar questions from people that are struggling to make ends meet, let alone settle their creditors.
It is a good question that deserves a proper answer, but it’s your call.
Whether debt consolidation is a good idea largely depends on your financial condition and the type of debt consolidation you have in mind.
Many people want to consolidate their Debt, but they have this feeling that it would affect their credit score severely.
Debt consolidation offers you a loan with reduced monthly payments and some near term relief, but the lengthier the duration of payment, the higher the resulting interest.
So you have to read the terms of the debt consolidation company before plunging yourself into a more significant Debt.
How Does Debt Consolidation Work?
Debt can be consolidated via two methods —personal loans or debt consolidation agencies.
The idea of consolidating debts is the same, but the terms and conditions differ. Let’s dive deeper.
How to Consolidate Debt With a Personal Loan
Debt consolidation is a collective term, which refers to one of these two methods. A personal loan often provides a lower interest rate.
People who borrow personal loans use it to settle their current debts, such as credit card loans, mortgage, car loan, or any other type of loan.
After you’ve settled the multiple debts, there’s only a single consolidated credit to settle on a monthly basis — the one to the personal loan creditor.
There’s a probability of settling the new Debt for a longer time since the interest rate is lower and the terms are favorable.
However, you’re expected to check the agreement for any loops and exceptions.
The best option for those struggling to make their minimum payments is debt consolidation.
Unlike bankruptcy, consolidating debts help lessen financial pressure, without training your credit score.
The best part of personal loan is the fact that it offers a way out of High interest and saves you from the consequences of late payments.
It’s important to note that although the interest rate may be lesser with personal loans, you might pay more interest over time since the payment duration is longer.
As soon as you’re stable financially, pay extra on the monthly minimum payments so that you could save money on interest throughout the debt consolidation program.
How to Consolidate Debt With a Debt Settlement Company
Apart from personal loans, another way out of Debt is offered by debt consolidation companies in the form of debt management plans.
These programs help debtors secure lower minimum payments with lenders by settling for a lower balance and interest on the debtor’s account.
The debtor is required to pay the consolidated debts to the debt settlement agency every month, and in turn, the agency pays your creditors on your behalf.
The creditor would close your account immediately; it is enrolled in a debt consolidation program.
This would increase your credit utilization rate, which can harm your credit score.
The lender might include a notification to the account that indicates the account is being supervised by a debt consolidation agency.
This notification or statement would be poorly perceived by future creditors.
Debt consolidation might reduce your monthly bills (Via bill consolidation) because you’re not paying your full debts.
Consolidating debts could trigger your creditors to report your credit accounts as settled or entirely settled for a lower balance.
Check if you qualify in two simple steps
- Step 1 – Select your debt amount below to see if you’re eligible
- Step 2 –Answer a few quick questions & join hundreds of thousands of Americans on the path to becoming debt-free
After enrolling for a debt consolidation program, the debt consolidation company would respond to making the payments on your behalf, but you need to monitor the process in case there’s any delay.
Peradventure the debt consolidation agency delays payment, it would reflect on your credit report and affect your credit score negatively.
Make a research on the offer and debt consolidation company before enrolling for a debt consolidation plan.
Ensure the debt consolidation agency is reputable, and terms are fair.
Frequently Asked Questions
What is debt consolidation?
Debt consolidation is defined as a procedure of adding debts into a single repayment plan.
There are various means of consolidating your debts — individually, with a Debt consolidation agency or via a debt counselor.
The aim of consolidation is to reduce the loan balance by lowering interest rates and extending the payment terms to suit the debtor and creditor(s).
In summary, debt consolidation is the replacement of various loans with a loan, usually with a reduced loan balance and lengthier repayment term.
What is Bankruptcy?
Bankruptcy is a legal process that’s often used as the last option.
The decision to file for bankruptcy should not be taken without recourse – you ought to seek debt counseling from a professional counselor for bankruptcy alternatives before declaring bankruptcy.
Debt consolidation might not be a good idea for debtors who have no means of paying the consolidated debts after the merger.
Bankruptcy is the best debt consolidation alternative for those in such a category.