If you have managed to drive yourself deep into debt with your carefree spending habits, you would have realized why it is called a debt trap. It is quite possible that the accumulated debt is so much that to pay even the minimum monthly payment, you need to take on more loans. With the typical rates of interest being what they are, you will end up wasting a great deal of money in interest payouts only and getting out of debt is only a distant dream. Among the best ways of getting a grip on your debt situation and save money, that you can otherwise use for productive purposes is debt consolidation.
Debt Consolidation Explained
Debt consolidation is essentially adding up all the balances on your credit cards and other unsecured loans like personal loans and repaying them with a debt consolidation loan of the same amount. The new loan from a bank, a private lender, or a balance transfer will wipe the slate clean and you will be left with only one loan of the same amount to pay back in monthly installments. The advantage of consolidating your debts is that you no longer have to monitor each of your credit cards and personal loans individually to make sure that you pay the minimum due amount by the due date every month, failing which, you are charged a steep late payment fee.
However, the biggest advantage of debt consolidation is that you get the benefit of escaping from the clutches of credit card balances with very high APRs since most debt consolidation loans charge rates of interest that are comparatively far lower for persons with reasonably good credit scores. Over the loan period, you will end up saving a great deal of money due to the lower rate of interest. If the EMI is unaffordable, you can extend the loan period so that the monthly payment gets lowered, however, you do end up paying more interest over the loan tenor. One thing that you need to understand very clearly is that by consolidating your debts, you do not reduce the amount of the outstanding by even a single dollar.
Top Methods of Debt Consolidation
Credit card balance transfer: If you have already chalked up a very large balance on your credit card, the amount of interest payout every month will be very high due to the steep APRs most of the credit cards charge on revolving balances. If you have a reasonably good credit score, you can inquire with some of the other card issuers whether you are eligible for a zero-percent balance transfer offer. Many credit card issuers have these promotional schemes to attract new customers and you may be able to get the zero-percent offer for as long as 21-24 months. The savings on interest can be huge as the average credit card APR, according to https://www.creditcards.com, is as high as 17.76 percent. However, you will need to factor in the transfer fees that are normally two to three percent of the balance transferred. You will also have to be careful to pay off the entire balance by the end of the promo period and also make sure that you do not miss even a single monthly payment as otherwise, the card issuer will invalidate the zero percent offer and charge you the normal rate of interest.
Loan from a Bank or a Private Lender
Normally, unless you have been a very good customer, banks are reluctant to give you a loan to pay off other loans. Their approval process is cumbersome and bureaucratic and those in a hurry will not be able to last the course. Private lenders, of which there are plenty to choose from, take advantage of this and ensure a speedy loan disbursal if you get the application process bang on. Many of the private lenders like NationaldebtRelief.com operate online and can extend the loan in a matter of days at very competitive rates of interest for applicants with good credit. Not only does this allow you to save a lot of money but also you can get the flexibility of adjusting the loan repayment period to make the EMI affordable if you so desire. It is important to choose the private lender with care because there are a lot of companies waiting to scam people with upfront charges that are illegal or surprises hidden in the fine print.
Peer-to-peer lending has come of age with a boom in online lending platforms that facilitate individual lenders and buyers to get together bypassing the conventional financial institutions. The biggest benefit of P2P lending is that borrowers with good credit scores can get loans at very low rates of interest starting from around 4.9%; however, you do need to take into account the impact of the origination fees that can vary from one to five percent of the loan depending on the amount.The approval process of P2P loans is typically far quicker than that of conventional lenders with the entire transaction being conducted online. Borrowers have to deal with a fixed term of repayment, typically, three to five years, so if you are looking for extended periods, this is not the route that you should consider. However, the advantage of this restriction is that it enforces discipline into the borrower to pay off the loan within the loan period.
Leverage Your Home Equity
If you are a homeowner and have been paying off the mortgage for a long time, you can use your home equity to take a loan at a very competitive rate of interest that will save you a lot of money. Since the loan acts as a second mortgage, you will need to be careful about not defaulting as this could put your home on the line leaving you without your most precious asset. You can also use a home equity line of credit that instead of a one-time loan gives you a credit facility very much like a credit card that you can draw upon when needed. With a HELOC, you pay interest only on the amount used by you and also have the comfort of getting as many as ten years to avail of the line of credit with another 15-20 years to repay it.
Getting caught in a debt trap can be financially crippling and compromise your long-term financial security. Debt consolidation represents one of the easiest ways of getting on top of your debt and saving yourself a lot of money. Whichever, method of debt consolidation, you choose, you should shop around for the best deal and read the terms of the agreement very carefully to know what you are signing up for.