subject: A closer look at debt consolidation and its main features [print this page] A closer look at debt consolidation and its main features
What is Debt Consolidation?In the simple terms, it is basically taking out a new loan that is used to pay off credit card and other high interest unsecured debt.What are the advantages of doing this?
Just imagine that each month you can make one payment to pay your debt instead of having to pay numerous.This give you the chance to do other more productive activities. This will decrease the risk that you will miss or be late on a payment and as a result harm your credit. The real benefit comes from the money that you will save as a result. Credit card companies are charging exorbitant interest rates on their customers outstanding balances and cash advances. Many have gone up close to the 30% and in case a company was charging 79%!.So would it not be nice if you take out a new loan to replace these high interest debts and pay one third the interest or less? The interest rate would also be fixed so you would not be subject to further rate increases and surprises. The amount that you would save would be substantial and this would also let you retire the debt quicker. You could improve your credit and credit score since you would be less likely to miss or be late on a payment since you would have to remember and pay only one loan. Of course this would only be applicable if you did not take on a large amount of additional debt.
There are three possible ways to refinance:
1) Home Equity Loan - This is the most favorable method because mortgage interest are very low currently and the interest would be fixed. This would produce the greatest interest savings and it would be the easiest loan to get since it is collateralized by the home. The proceeds from the home equity loan would be used to retire the unsecured high interest loans which are mostly comprised of credit card debt. Your sole monthly payment would be for the new loan.
2) Unsecured Loan - The main factor in obtaining this type of loan is your credit. With good credit you could get a new unsecured loan that still would yield substantial interest savings.
3)Low interest no annual fee credit card - This is the least desiresable one and it involves getting a new zero interest or very low interest credit card with no annual fee and transfer your existing high interest debt to it. This would leave with one payment with a low interest card, but you would still be at the mercy of the credit card company if they decided to boost your interest rate or impose other fees.There are those rare occurrences were the debt consolidation company can negotiate a loan discount. This are the cases were the debtor is near bankruptcy and they would rather recoup some of the principal than none at all. However, this type of circumstances is rare and it resembles a Debt Settlement Program rather than a Debt Consolidation.
In summary:
Debt Consolidation offers several distinct advantages and can be an affective Debt Relief tool. Its a financial organizers by reducing the number of payments you need to make each month. Reducing the time and effort need to keep track and pay all your bills. It also can be an effective way to reduce the cost of your debt by replacing credit card interest rates with a fixed lower rate. This also can result in helping you pay off the debt quicker. It can help boost your credit score by lowering the risk of being late or missing payments. So Debt Consolidation clearly has it advantages and makes your life less stressful and gives you greater financial freedom. It is a mechanism to get your finances organized and less complicated Depending on your circumstances this method of debt relief is worth taking a look at as one of the options for becoming debt free.
