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 your payments in due time.
In case of any illness, medical bills can pile up, 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 make sure you avoid the aforementioned risk of falling into an endless debt spiral, we’re going to inform you on what approach you should take when considering and handling your debt consolidation.
By learning the subtleties of debt consolidation, you can improve your lifestyle and wellbeing, and ensure a safer and secure financial future for you and your family.
What Is Debt Consolidation?
Debt relief loans allows you to take your multiple debts and combine them into a single debt. Thus, you can take it as a single loan with much better terms, such as a lower interest rate. Consolidating debt provides a new loan that covers your old debts. The main goal is to put all your debt into one loan payment.
In short, Debt Consolidation allows you to get rid of all the small loans so that you can gain back control over your finances again. If you’re in debt with multiple creditors, this is the best financial option available. Take all your outstanding credit and put it into one loan with a convenient and single monthly payment.
How Debt Consolidation Works
While this is the only way out for many people, debt consolidation can be a tiring and quite a long process. The truth is, it’s well worth the effort, as it provides a way out from a financial setback, and it can be tailored to suit your exact needs.
With that in mind, here are 4 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 who have good to excellent credit. Credit cards with a 0% balance transfer introduce zero introductory interest rate for the grace period. That period is usually between 12 and 18 months. The only two fees to think about are the annual and balance transfer fees, and that’s it.
2. Lines of credit/home equity loans
This is a good option available to all who own a home. You get a loan with a fixed interest rate that is based on the equity in your home. A line of credit is a bit different than that. It’s basically the same as a credit card, the only difference being a variable interest rate.
What makes this loan stand out is that you can get it with average credit and at lower interest rates than an unsecured loan.
3. Personal loans
The Personal loans option falls under the category of unsecured loans, and it can be acquired from a number of different 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 mostly offer higher interest rates than credit unions.
Personal loans allow for an early pay-off free of any 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 show up 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.
In case you can’t repay or miss more than two payments, you’re prone to a substantial penalty that could possibly 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 fully so that you can make educated financial decisions. This will help you avoid many difficulties along the way.
Your credit score depends on 5 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 is your credit file
- Recent credit inquiries – make up 10% of your credit score
You need to take all these key elements into consideration if you want to ensure a good credit score. More importantly, you can avoid a lot of bad financial situations if you pay attention to these elements from the beginning.
Debt Consolidation – 12 Benefits
Depending on how you use debt consolidation, it can have a positive or negative impact on your credit score.
Here are the following benefits of debt consolidation:
- Debt consolidation 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 a lower amount of late fees, which positively affects your credit utilization by declining it, which will improve your credit.
- It includes a lower ratio of credit utilization.
- Debt relief loan helps boost your credit score by paying off all your late payments.
- It helps diversify your credit file.
- Debt consolidation allows you to reap the benefits of both the installment of a personal loan and a credit card revolving loan.
Debt Consolidation – The Downsides
Now, despite the fact that there are a lot of positive things about debt consolidation, it isn’t without downsides:
- Since debt relief loans fall into the category of personal loans, it will require your credit report, which might slightly reduce your credit score.
- Debt consolidation can pose a risk to those with poor financial habits. In the worst-case scenario, you’ll end up with more debt, which is a no-way-out situation.
That’s why debt consolidation shouldn’t be taken lightly.
3 Pro Tips on Debt Consolidation
1. Make sure 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 for you if you can get a loan with lower interest rates than your current loans or 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 important thing to keep in mind is that 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 0% interest rate.
- You have healthy and smart financial habits.
Debt Consolidation Loan Offers Recap
Debt Consolidation & Relief Loans Frequently Asked Questions
Debt consolidation loans fall into the category of both secured and unsecured loans. These credit facilities depend on the lenders. The difference between the two is that secured loans require some kind of collateral to get a loan.
Any asset that can be liquidated or equity, like a home, can be used to secure the loan value. Secured loans pose more risk for the user simply because the user can lose their assets and equity in case they can’t pay off what they owe.
Yes, there is a big difference between the two.
Debt settlement involves a debt counselor who provides their financial expertise and skills to help you find the best financial solution to your problems. They can negotiate to get you a better settlement amount to decrease your debt.
On the other hand, debt consolidation means that you’re getting a chance to consolidate all that you owe into one loan facility to gain control over your debt and track your monthly payments much easier.
Debt consolidation is a better option simply because a debt settlement strategy includes additional costs and expenses that you have to cover for. Debt counselors don’t work for free, and these costs add up to your overall debt amount. However, you can speak to a debt counselor before making a settlement to see what your options are.
Related: Credit Repair Services
Poor credit is one of the biggest reasons people are turned down when applying for any type of loan. It only allows you to apply for consolidation loans with much higher interest rates.
If your credit is bad or poor, the best thing you can do is some research on which loan providers offer the best deal for you. Check their monthly payments and annual percentage rates to see if you can afford to commit.
Be mindful of your monthly cash flow, credit score and history, and overall debt amount before you commit. You have to be comfortable with your monthly payment to make things work in your favor. Make sure you don’t accept any hard credit checks.
No one can give you the right answer to this question, as people have different needs and financial situations. We would suggest that you go through our pro tips to determine if debt consolidation will work in your case.
If you have a good credit score, steady incomes, and healthy financial habits, this could be a great solution to your financial problems.
Now, if you have bad spending habits, bad or no credit, no steady cash flow, a risky budget, and more than one credit card, debt consolidation might not be the best financial option for you.