Debt Consolidation Protection and Loss
Credit consolidation can be an effective way to get out of debt if you are careful!
If you have trouble reaching your goal each month and looking for answers, debt consolidation can help if you are disciplined, understand what consolidation can and cannot do, and follow some simple guidelines.
What is debt consolidation?
Debt consolidation is the process of collecting debts into one account with only one monthly payment. The idea behind consolidation is to reduce the number of payments you have to make, and if possible, reduce the interest rate and the total amount you have out of pocket each month, making it easier to pay off your balance.
Things to remember
While debt consolidation can be an effective way to control your debt, there are some things to remember.
- Debt consolidation generally will not include your secured loans like your car loan. It applies to unsecured debt such as credit cards, personal bank loans, credit lines and other debts such as medical bills.
- Debt consolidation will not work unless you stop using your credit cards. and other accounts you include in consolidation. It’s best to close your accounts and reduce your credit cards. Some debt consolidation lenders may require you to do so as a condition of the loan.
Types of debt consolidation
There are several ways to consolidate your debt. Here are some to consider.
Consolidation Loan: Many financial institutions offer some type of consolidation loan, including banks, credit unions, and finance companies. If you already have an affiliation with one of these institutions, it will be a great place to start and you might get a break from the interest rate.
With a bank personal loan, you will make the same payment every month for a fixed period of time, usually three to five years. It’s actually like a car loan. In fact, some banks offer loan consolidations for which you can invest a savings account or CD as collateral. This will usually get you a better rate, but it only makes sense if you get a decent rate on savings.
Otherwise, you will probably be better off using your savings to pay your debts.
Since personal credit has a certain duration, it is easy to track your progress and know when you will finally be out of debt.
Consolidation Credit Card: If your credit is already fairly good, you may qualify for a credit card to which you can transfer the balance. People often do this when receiving an offer with an attractive rate for balance transfers.
Please note that this may affect your credit score. FICO scores take into account your credit utilization (how much credit you use compared to what you have available) and the total amount you owe, among other factors. When you pay your bill, credit utilization goes down (which may be good for your credit score), but you will have one account with a large balance (which can negatively affect your score). However, probably, if you have a lower interest rate, you will pay the bill faster.
Home Equity Loan: If you own property in your home, you may be able to use home equity loan funds to pay off your high-interest rate loans.
Since home equity credit is secured by your real estate, you are likely to be offered a rate that is much better than what you pay on your credit card accounts.
But it’s a double-edged sword. If you run into problems later and are unable to make a payment on your loan, put your property at risk because your lender will have the right to stop the loan.
Good Credit: Similar warnings apply to Good Credit. If you find it attractive to use that fine balance you have in your retirement account to pay off that debt, but you need to be careful.
If you have trouble repaying that loan, it will be converted into a withdrawal. You could be hit with early penalties of 10%, and pay taxes that you didn’t pay when you deposited the money. If you change jobs, your 401k loan can be repaid within 60 days or considered distribution (with penalties and taxes).
Consolidation with respect to a debt management plan
Conduct an online search for a “debt management plan” and come up with dozens if not hundreds of companies offering to help you take control of your finances.
These companies, many of which claim to be nonprofit, provide a contract from your creditors that will allow you to pay off your debts by paying a monthly payment to the agency that distributes your payment to your creditors.
In some cases, the agency may provide agreements to deduct interest and delays, but that concession is voluntary and some lenders refuse to facilitate it. Ideally, a payment plan is a fixed-term payment that will pay off your bills in full.
It is best to work with an affiliate of the National Credit Counseling Foundation. You can find supporting agencies in your area by using the agency search button on the website.