Debt Consolidation Loans: The Pros and Cons
Total household debt reached a record in the first quarter of 2017, according to a report by the Microeconomic Data Center. With $ 12.73 trillion, it is $ 50 billion more than the previous maximum, which took place during the 2008 financial crisis. With the recovery of the economy and the tightening of banks’ credit practices, more Americans have access to credit.
While the largest increase in household debt has occurred in the mortgage sector, credit cards, student loans and auto loans still have significant debt impact and this trend shows no sign of slow-down.
Reasons people get into debt
There are many reasons why consumers may find themselves struggling with a mountain of debt. Some of these reasons are self-imposed, while others are out of the control of the consumer. Many Americans have received little or no training or instruction on how to manage money or invest for retirement. Because schools do not usually teach these skills, many are only discovering how to budget and manage their finances.
Most consumers have very little money saved to fund emergencies such as car repairs, household expenses such as a roof or furnace, or a trip to the emergency room. For this reason, many consumers rely on credit cards and other high-interest credit sources to finance these emergencies. Sometimes consumers go into debt when an unexpected event occurs for which they are not financially prepared, such as the loss of a job or illness. When that happens, things can deteriorate financially very quickly. Without the help of credit cards, many can not survive.
Consumers often go into debt because of excessive spending and living beyond their means. Many do not realize the financial problems they have encountered until it is too late. When they can no longer fulfill their obligations, the options they have for resolving the debt are few.
However, if a consumer recognizes the situation early enough, there are things the consumer can do to ease the burden and facilitate the payment of debts. One of these solutions is a debt consolidation loan.
What is a debt consolidation loan?
A debt consolidation loan is a loan that groups debt into a single loan with a single payment. In general, consumers aspire to get a lower interest rate, so the new payment is less than the sum of all current payments to creditors. In general, the goal is to reduce the amount of money coming out each month and streamline the payment process with just one payment.
By reducing overhead and streamlining the payment process, many consumers feel they have a clearer way to control their debt and repay it. Many times, the loan term is longer and the interest rate is lower, so the new payment can be significantly lower than the current payments. With a clean slate, they feel that they can finally be aware of the problem of debt.
There are several types of debt consolidation loans for consumers to consider. The right choice depends on the individual circumstances, the size of the loan and the consumer’s credit score.
For example, a person who owns a home and owes much less than it is worth could qualify for a Home Equity Line of Credit (HELOC). Funds from a mortgage-backed line of credit can be used for anything the borrower chooses, which is often the first place a consumer uses when seeking to consolidate debt. Home equity lines of credit can be easily eligible if a consumer has substantial equity, a verifiable income and a decent credit score.
Another type of loan used by consumers who own a home is the refinancing of a home with cash withdrawal. This means that the consumer borrows more than the previous mortgage and uses the extra money to pay the existing debt. Again, a consumer must have enough capital in his house, a verifiable income and a credit rating of good to excellent.
If the debts of a consumer are not too large, you can sometimes obtain a personal loan from a bank, a financial company or another credit institution. Interest rates are generally lower than they are in your current debt, but the terms are short. These loans help the person pay the debt faster, but they do not necessarily reduce the total amount paid each month.
What are the advantages of a debt consolidation loan?
A debt consolidation loan can be very beneficial. You will only have one monthly payment to save you, which will reduce your chances of losing a payment to a creditor. It is also likely to face a lower interest rate and a lower monthly payment.
A Simple Payment
One of the best things to consolidate your debt is to combine all your payments into one monthly payment. Being able to make a single payment a month reduces the possibility of late and late payments, which can help improve your credit score if this has been a problem in the past. rethink their lives, dealing with one creditor is beneficial. Writing only one check or processing a single online payment can save you the time and energy you can spend on family or life in general.
A lower payment
The goal of most debt consolidation loans is to realize a lower payment through good terms and a lower interest rate. If done correctly, a debt consolidation loan can save space in a budget so that a family saves money instead of spending all the monthly income on the bills and the decent pay on the salary.
Lower interest rates
To make a good loan choice, consumers need to make sure they understand the interest rates on their credit cards and other debts. They should gather all their returns and make a complete list of balances, interest rates and special conditions, such as introductory interest rates. This process is necessary to ensure that you are consolidating your debt at a lower interest rate and moving forward in paying your debt. If they have done their homework, they should go out with better terms and a lower payment in general.
Catch up on bills
If a consumer is chronically late and only pays his bills on time each month, a debt consolidation loan can help you catch up and maybe even move ahead soon enough to save each month. Families who have difficulty paying their bills every month have the opportunity to catch their breath. If you can start saving money, your entire financial situation could start to change. Instead of having to rely on credit cards to finance emergencies, they would have enough savings to pay in cash. This would stop the cycle of debt accumulation when cash flow is insufficient.
What are the disadvantages of a debt consolidation loan?
While there are advantages to consolidating debt through a debt consolidation loan, there are some potential disadvantages that every consumer should consider. These can have significant negative effects on a family’s financial landscape.
Risk of re-accumulation of credit card debt.
When consumers use a debt consolidation loan, they do not go through the long and arduous process of paying bills and credit card debt one by one. This painful alternative makes it unlikely that consumers will become indebted again, because they know first-hand how difficult it is to pay bills and release debt. However, if the process becomes easier with a debt consolidation loan, there is a possibility that consumers who have not changed their habits and closed their credit card accounts can end up where they started. If you use a line of credit with a mortgage guarantee or a refinancing of the house to consolidate your debt, you not only have the opportunity to accumulate more consumer debt, but also the possibility of ending up with a larger mortgage. If debts increase so much that they can not fulfill their obligations, they could jeopardize their greatest asset, their home. They could pay more interest for a longer term loan. Those who use home equity loans or repay loans to repay their credit. The card debt will probably have a very long loan term. Most first mortgages have a term of 30 years and home equity loans are often very difficult to get. It would be practical to do some calculations to make sure that interest paid during the term of the loan does not exceed what you would pay with a three-year repayment.
Consumption habits do not change.
Consumers who use a debt consolidation loan to manage their debt problem do not learn the hard lessons from this one who just puts their nose on the stone and pays for it. As a result, very few changes for consumers after debt consolidation. Often the cash flow generated by the process is quickly absorbed into the expenses of everyday life, especially for those with low budget and money management skills. In a word: if consumption habits do not change, it is likely that consumers will again be heavily indebted in a very short time.
While debt consolidation may be a good option for some, those with low credit or weak money management skills will likely have difficulty qualifying. If this is the case, consumers have several options to consider.
If a consumer is serious about paying off debt and has self-discipline to cut costs and dedication to making a plan, it’s worth considering some DIY methods. Debt management is a difficult path, but some consumers can succeed. One method is simply the three-year plan. On the front of each credit card statement, there is a chart that shows how much you have to pay to eliminate the balance in three years. Just close the account and set up automatic payments every month. In 36 months you will be debt free. The other method of DIY debt management is the “snowball” method. This involves starting with the lowest balance and paying as much as possible each month while continuing to pay the minimum on all other accounts. Once the lowest balance is $ 0, attack the next highest balance in the same way. As time goes on, balances fall as payments “go up” and become more and more important.
Working with a Debt Relief Company
Those who can not advance their debt and are dangerously close to not being able to fulfill their obligations may want to consider working with a debt relief company. Companies are working with consumers to settle their debts with creditors, sometimes for pennies on the dollar. On the other hand, the stress of creditors calling and demanding payment disappears, since the debt relief company takes over all communications. While a consumer’s credit score is likely to be a addressed, it’s probably not in good shape to start, and the damage will certainly not be as sustainable as a bankruptcy. Tackling overwhelming debt can be a difficult process for any consumer. However, the most important thing to remember is to act before your options become too limited. Take control of your debt today and start on your way to be debt free.