An emergency or unplanned calamity can cause you to lose control of your finances. Short-term disability or an unexpected job loss might affect your ability to make payments in due time. Medical bills can pile up in case of illness, causing you to spend your credit card limit. A lot of these problems can be solved with debt relief loans.
We at Market Pro Secure® take pride in providing detailed information regarding financial security and options people have but aren’t aware of. To help you avoid the aforementioned risk of falling into an endless spiral, we’ll inform you what approach you should take when considering and handling your debt consolidation. Learning a few important things can improve your lifestyle and well-being and ensure a safer and secure financial future for you and your family.
What Is Debt Consolidation?
Debt relief loans allow you to take your multiple debts and combine them into a single one. Thus, you can take it as a loan with much better terms, such as a lower interest rate. Consolidating debt provides a new loan that covers your old ones. The main goal is to put all your debt into one loan payment.
In short, this allows you to eliminate all small loans and regain control over your finances. This is the best financial option available if you’re in debt with multiple creditors. You can consolidate all your outstanding credit into one loan with a convenient single monthly payment.
How Debt Consolidation Works
While this is the only way out for many, debt consolidation can be tiring and long. It’s well worth the effort, as it provides a way out from a financial setback and can be tailored to your needs. With that in mind, here are four great ways to consolidate your debt in the most effective way and at the most convenient terms.
1. Credit cards with a 0% balance transfer
This is the best option for those with good to excellent credit. Credit cards with a 0% balance transfer introduce zero introductory interest rates for the grace period, usually between 12 and 18 months. The only two fees to consider are the annual and balance transfer fees.
2. Lines of credit/ home equity loans
This is a good option available to all who own a home. You get a fixed-interest rate loan based on your home’s equity. A line of credit is a bit different than that. It’s the same as a credit card, the only difference being a variable interest rate. This loan stands out because you can get it with average credit and lower interest rates than an unsecured loan.
3. Personal loans
The Personal loans option falls under unsecured loans, which can be acquired from several providers such as an online lender, a credit union, or a bank. The trick is to find the best providers with the most convenient terms. For example, online lenders mainly offer higher interest rates than credit unions. Personal loans allow for an early pay-off free of charge, while the originating fees range between 1% and 5%. The better your credit, the lower the rate.
4. 401(k) Loan
This type of loan should be your last resort due to the high level of risk involved. This type of loan doesn’t appear on your credit report and involves lower interest rates than an unsecured loan. That aside, the problem is what happens if you miss your payments. If you can’t repay or miss more than two payments, you’re prone to a substantial penalty that could drive you to a real financial crisis. If you quit or lose your job, you’ll be required to pay your loan off in 60 days, even though it’s due in five years.
Debt Consolidation and Your Credit Score
Since your financial security is our top priority, the best advice we can give is to take control of your credit score right from the start. The only things that can guarantee a safe future are smart financial habits. Everything starts with your credit score, and it’s paramount to understand it thoroughly to make educated financial decisions. This will help you avoid many difficulties along the way. Your credit score depends on five key elements:
- Payment history – makes up 35% of your credit score
- Debt – what you owe makes up 30% of your credit score
- Credit history – makes up 15% of your credit score
- Credit file – 10% of your credit score depends on how diverse your credit file
- Recent credit inquiries – 10% of your credit score
You must consider all these key elements to ensure a good credit score. More importantly, you can avoid many bad financial situations by considering these elements from the beginning.
Debt Consolidation – 12 Benefits
Depending on how you use debt consolidation, it can positively or negatively impact your credit score. Here are the following benefits of debt consolidation:
- It helps improve your credit score by consolidating all your debts into one big loan.
- It allows for better financial control.
- You have only one monthly payment to worry about instead of several.
- Keeping track of one payment is much easier.
- Debt consolidation includes lower interest rates and a fixed term.
- Paying on time looks good on your credit score and report.
- You won’t have to worry about several different due dates, which will decrease your chances of missing a payment.
- High-interest debts include lower late fees, positively affecting credit utilization by declining and improving credit.
- It includes a lower ratio of credit utilization.
- A debt relief loan helps boost your credit score by paying off all your late payments.
- It helps diversify your credit file.
- It allows you to reap the benefits of both a personal loan installment and a credit card revolving loan.
Debt Consolidation – The Downsides
Now, even though there are a lot of positive things about debt consolidation, it isn’t without downsides:
- Since relief loans are personal loans, they will require your credit report, which might slightly reduce your credit score.
- It can pose a risk to those with poor financial habits. In the worst-case scenario, you’ll have more debt, a no-way-out situation.
That’s why debt consolidation shouldn’t be taken lightly.
3 Pro Tips on Debt Consolidation
1. Make sure a debt relief loan is favorable for you
No one can tell you for sure if debt consolidation will work in your situation or not. However, you can consider a few things before you make a decision:
- The interest rate has to be lower than with your original loan.
- Loans with lower monthly payments usually work in most situations.
- Shorter-term loans include less interest, while longer-term loans include lower monthly payments.
2. Only go with lower interest rates
Debt consolidation is only favorable if you can get a loan with lower interest rates than your current loans, monthly payments, or debts.
3. Pay special attention to favorable factors
Debt consolidation is only favorable if:
- The amount of your total debt doesn’t go over 40% of your gross income. The critical thing to remember is that a mortgage is excluded from your total debt in this case.
- You can make all your payments toward your debt on time.
- You can qualify for a debt consolidation loan with a 0% interest rate.
- You have healthy and wise financial habits.