Consumers can use debt consolidation loan as a tool to deal with student loan debts, credit card debts and other types of debts.
What is the importance of this loan?
Debt consolidation basically is to take out a large loan from a bank or credit union and use that money to pay several smaller debts. This process is very common, especially in the United States. In effect, multiple debts are combined into a single larger debt, usually with more favorable terms of paying a lower interest rate, lower monthly payments or both.
Are you in trouble with credit cards? Do you owe thousands of dollars of your college loan? Did you ask for a new loan for a car? The minimum monthly payments are not doing any trick to help you pay off your total debt, right? Something has to change and you are already considering the reunification of debts as an alternative to your financial health. Enter the world of debt is very easy, you go shopping, you choose what you like, you pass your credit card and you forget everything that follows. You do not have to worry about paying your card statement for a few weeks until the end of the month.
Getting out of debt can be difficult. You will need to check all your available options to see which one makes the most sense for your financial situation, budget, and income. You may have heard of several debt-gathering agencies that announce quick relief of their obligations. Since there are several different methods to relieve debt, it is important that you look for the type of help that is right for your situation.
What is the most important thing to keep in mind in this process?
This can be effective unless you have a less than perfect payment history and a low credit score which means that you may not be approved for a debt consolidation loan. Here are the most important things you need to know before consolidating your debt,
- Debt consolidation is a refinanced loan with extended payment terms
- The extended payment terms mean that you will be in debt for longer
- A lower interest rate is not always a guarantee of a better loan
- Consolidation does not mean the elimination or liquidation of debts
- What alternatives do you have to consolidate your debts?
- Pay the debts yourself
- Obtain a debt consolidation loan
- Transfer your balances
- Solve and settle your debts
- Hire help from an agency specialized in these negotiations
Pay the debts yourself
Do not believe anyone telling you that you cannot pay your debts on your own. It is entirely possible to gather the necessary financial resources to reduce and eventually eliminate your balances forever. To do this, you will have to pay your debts one at a time. You could start by paying the credit card with the highest interest rate while still making the minimum payments on your other credit cards. First, you will pay the cards with the most expensive interest and thus minimize the payment of long-term interest.
This is called the debt stacking method and is suggested by many experts because in the long term it will save you more money. However, it can take a long time to pay a high-interest credit card, especially if you have a large balance. To pay the total debt, you will have to persevere and simply continue with the plan month after month.
If you were to choose this method, you would put your credit card debts in order from the one with the lowest balance to the one with the highest balance and then put all your efforts against paying the one with the lowest balance. The idea behind the Snowball method is that you would be able to pay one of your paid credit cards fairly quickly and then have extra money available to start paying off the credit card with the second lowest balance and so on.
Conclusion: Transfer your balances
If you have several credit cards and especially if they are high-interest cards, another option would be to make a balance transfer to either a card with a lower interest rate or better, a balance transfer card with 0% interest. If you were able to transfer credit card debts that average 15% to a new 12% you would have a lower monthly payment and this could make it easier for you to reduce your credit card debts. An even better deal would be to transfer those debts to a balance transfer card with 0% annual interest, which would give you an interest-free timeout between 6 and 18 months during which you would not have to pay any interest at all (0% APR). This means that all your payments would go against the reduction of your balance and you could be debt free before your promotion period ends.