If you are swallowed up by financial liabilities, debt consolidation may be the only ticket you need. However, there are multiple strategies to consider. This can help you decide which is right for you.
What is debt consolidation?
Unsecured debt consolidation The process of combining multiple debts such as credit cards or student loans into one monthly payment. Debt consolidation services It can lower your interest rate, helping you save money, lower your monthly payments, and help you pay off debt faster.
When evaluating a debt consolidation strategy, you may like Consider a balance transfer. This entails opening a new credit card with a promotional low interest rate or zero percent, and then transferring your existing credit card debt to it. Basically, you will have lowered your interest rate, which will save you money.
There are usually fees on the transferred amount, although some credit card companies waive these fees for consumers with excellent credit. There will also be a maximum amount that you can transfer.
This might be a good strategy, provided you get your credit score on the promotional rate, which expires after a while. However, there is one caveat here, make sure you only transfer an amount that you can clear before the promotion window closes. Otherwise, you can look at a much higher interest rate.
Debt Consolidation Loan
This type of debt consolidation works similarly to a balance transfer, it’s just that you take out a loan rather than a line of credit.
What you do is open a loan, use it to pay off your current debts, and then pay off the loan. Just as you do with balance transfers, you’ll get the best terms if you have good to excellent credit.
This is only a wise strategy if the loan has a significantly lower interest rate than the current debt rate. You can likely avoid the construction fees, which some lenders charge, if you shop around for some.
This might be a smart approach if the loan offers better terms than any available balance transfer, or if you are concerned about being able to pay off the balance transfer debt during the introductory interest period.
Debt management program
The above strategies are generally aimed at those with good to excellent credit. But you still have options if your credit score is less than ideal, and you have high-interest debt. One of them is debt management software.
These plans include working with a credit counseling agency to pay off your debts. You will make one monthly payment, which the debt management company makes to your creditors. In some cases, your creditor will cut interest rates and waive fees while you are on the plan, which has been structured so that the payments can be managed. The plan continues until your debts are paid.
Technically, debt management is not a form of consolidation, as your accounts under the plan remain separate and are not incorporated into a new financial commitment. However, the strategy offers the benefits of consolidation as you are only required to make one monthly payment and you often receive reduced interest rates.
This could be a smart solution if your credit renders you ineligible for favorable rates on a balance transfer or consolidation loan, and if you wish to obtain financial advisor as a resource and financial education during repayment. It may also be a good step if you often have high-interest unsecured credit card debt, or think you will have a hard time paying off a consolidation loan.
So, yes, a lot goes into evaluating a debt consolidation strategy. But at least you have options. As you compare it to your financial situation, she will create a plan that works for you.