When you have fallen into debt, you may believe debt consolidation is the only way to tackle your mounting finances. There are some benefits to seeking this solution.
However, you may ultimately end up paying more money in the long run if you choose to consolidate your debt. When you consolidate loans, you take out a new loan in order to pay off your existing debt.
To receive approval for a debt consolidation loan, you must have a good credit score, which many people who are in significant debt often lack. There is a possibility that when you choose to consolidate your debt, you end up in a less financially stable condition, as you are paying more for your new loan payment than you are for your existing debt payments. Even if your monthly are lower than they were before, this is usually because they are spread out over a longer period of time. To avoid falling victim to the debt consolidation myth, try one of these alternative methods for becoming debt-free instead.
One of the most efficient ways to eliminate your debt without the assistance of a debt consolidation loan is to create a debt management plan, otherwise known as DMP. Your credit score does not affect your ability to receive approval for a DMP. This is beneficial if you have bad credit due to your current situation. When you apply for a debt management plan, you are essentially allowing a consolidation company to oversee the payment of your debts for you. To begin the process, you must close your credit card accounts and allow the consolidation company to complete the remaining payments for you until your debt has been paid in full.
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With a debt management plan, you are required to pay a fee to the management company to retain its services. The fee you must pay for your DMP is typically less than what you would pay per month for each of the bills you have amassed from your total debt. You must carefully research the debt management company prior to beginning this process, as there are scam companies who try to take your money without actually assisting you in reducing your debt. Other companies do the bare minimum, keeping you reliant on their services but never actually relieving your debt.
If you want to manage your debt without the assistance of a third party, you can speak with each of your creditors directly to describe your current financial situation. In doing so, you may be able to close your accounts independently and then work with each creditor to determine a rate you can comfortably pay until your debt has been repaid.
When you choose to manage your debt yourself, it is important to select a monthly repayment plan you can pay back successfully to avoid any further financial debt or damages. You must be honest with yourself and create a plan you know you can pay. Otherwise, you risk falling further into debt. If this happens, it is unlikely your creditors will negotiate another payment plan.
Your credit card bills may become unmanageable if you are paying a high interest rate on each of your purchases. If your credit card has a high interest rate, your debt continues to increase each month if you either fail to make your payment or if you opt to only pay the minimum amount toward your balance.
To avoid this ongoing issue, you can transfer the balance on your current credit card to one offering a lower interest rate or a zero percent interest rate. In doing so, you are allowing yourself the time you need to pay down your debt without having to worry about the increased interest adding to the total each month.
If you want to seek this alternative to debt consolidation, you must ensure you have an average credit rating. Applicants with a low credit rating often have difficulty getting approved for a credit card with a low interest rate. When you are choosing a new card to transfer your balance to, you must select a card with a low interest rate or zero percent interest rate for approximately 12 to 24 months. This gives you the time needed to make your payments while still saving money.
It is important to repay all or most of your debt within this 12- to 24-month window, as your interest rate typically increases after this welcoming period has elapsed. Additionally, many of these cards have a $10,000 limit, which means you may need to seek an alternative for your debt solution if your current debt surpasses $10,000.
If you are in debt due to payments you are making toward your home loan, debt consolidation may not benefit you. With a home loan, you are solely focused on repaying one large debt instead of repaying several smaller debts. To move yourself into a better financial situation, you can apply for a home equity loan, otherwise known as a second mortgage. You may be hesitant to take out a second mortgage while you are struggling to repay the first, but this method is the most practical when you cannot repay your debt in an appropriate timeline.
The rates associated with a home equity loan are significantly less than those attributed to a debt consolidation loan, which means you are starting in a better position by selecting this option. Additionally, home equity loans are often viable for a period of five to seven years, meaning you have a significant amount of time to pay off your debt while meeting the minimum payment for your loan as well. Home equity loans typically have a low interest rate, which means you do not need to worry about your bill unexpectedly increasing every month.
An added benefit of having a longer period to repay your debt is the low monthly payments you are required to make each month. When you are spending less per month to meet your debt payments, you allow yourself to get ahead of the issue. You must have a good credit score to utilize this option, as many lenders do not approve applicants for a home equity loan if their credit score is below 660. You can speak with a lender directly to determine the qualifications you must meet for this type of loan.
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