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Understand Your Debt Consolidation Loan Options

You are not alone if you are continually concerned about how to make your next credit card payment. Approximately 80% of Americans are in debt. You don’t have to be a spendthrift to find oneself in this situation.

Total household debt in the United States has soared in recent years, with a projected peak of roughly $14 trillion in 2020.

US household debt has surpassed $14 trillion in 2020. (Source: Reuters.com)

What can you do if you’re facing financial difficulties? What resources are available to help you get out of debt?

Credit counseling, debt consolidation, debt negotiation, and bankruptcy are all possibilities. You need to know the answers to a few questions before deciding on debt consolidation, such as:

  • What is debt consolidation and how does it work?
  • What are the various kinds of debt consolidation?
  • What is the process of debt consolidation?
  • What are the advantages and disadvantages of debt consolidation over alternative debt relief options?
  • What are the advantages and disadvantages of debt consolidation?
  • Who are the best debt consolidation candidates?
  • Is debt consolidation bad for your credit?
  • What are the eligibility criteria for consolidation loans?
  • Is settling your debts a better option for you?

What Is Debt Consolidation?

The act of combining various types of debt into a single burden is known as debt consolidation.

Paying off all of your credit card balances, with their high-interest rates, varied due dates, and connected terms, is the first step toward consolidating your debt, or bringing it all under one roof. Taking out a debt consolidation loan can help you do that.

To put it another way, you pay off one debt by paying off another. Such an approach is often discouraged by personal finance specialists. Why?

It’s because you must choose your loan with considerable caution. There are a few criteria that must be true for a debt consolidation loan to be a viable option:

  • You need a loan with a lower (ideally fixed) interest rate.
  • Your overall debt should not exceed 40% of your gross income, excluding your house payment.
  • To prevent charging any more on the credit cards you’re consolidating, you should have a plan in place.
  • You should be able to afford the monthly consolidation loan payment without excessive hardship if you have enough income.

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Debt Consolidation Types

Unless you can acquire a loan that will assist you in meeting those conditions, the only benefit of debt consolidation will be an easy-to-remember payment schedule. The devil, as usual, is in the details. If you make rash decisions, you can end up with a loan with worse conditions than the debt you’re replacing.

Transferring credit card balances

A credit card balance transfer is the process of shifting debt from a higher-interest credit card to one with a lower interest rate and more benefits. A fee is normally charged for such transactions. This fee may be waived in some situations by the credit card company.

Balance transfers on credit cards frequently have introductory interest-free periods of up to 18 months.

The catch is that if the cardholder agreement is broken, the setup is nullified. As a result, you may be subjected to unexpected interest and penalties.

Keep a close eye on all of the data, including the APR and transfer costs. In many circumstances, when transfer fees are factored in, you may end up breaking even or, even worse, paying more in the long run.

Unsecured loans

If you get the correct terms on an unsecured loan, it can be a good alternative. This type of financing does not need you to put your house up as collateral. You won’t have to worry about foreclosure if you use it.

The better your credit score, the better the terms of your debt consolidation loan. This is why, in order for a consolidation loan to be a viable option for you, you must be in good financial standing.

Home Equity Loan

A home equity loan is a lump sum payment made by the creditor to the homeowner. Its size is determined by the homeowner’s equity (the current value of the home, minus any outstanding mortgage balance). Home equity loans have the advantage of having a low interest rate, which makes them ideal for debt consolidation.

The negative is that the loan terms may be stretched out over a long period of time, making this choice less likely to be the quickest way to pay off your debt completely. Another downside is that, because the home equity loan is backed by your home, you may lose your home if you default on your payments.

A HELOC (Home Equity Line of Credit)

Unlike a home equity loan, which has a set monthly payment, a HELOC functions similarly to a credit card. The lender sets an amount limit and a time limit based on your home equity. You can borrow money as needed within these restrictions.

If you’re in decent financial position, a HELOC could be a reasonable debt consolidation option. Remember that a HELOC is a secured loan because it functions as a second mortgage. That implies that if you miss a payment, you risk losing your home.

How Does Debt Consolidation Work?

To further understand how debt consolidation works, consider the following example. You currently owe $26,000 at an interest rate of 18 percent. If you only pay the 3% minimum payment of $780 each month, it will take you ten years to pay off and will cost you almost $21,000 in interest. If you consolidate your debt into a 5.8% APR loan and pay $500 per month, it will take you 5 years and cost you around $4000 in interest.

The main thing to keep in mind is that you’ll need a decent credit score and a low debt-to-income ratio to qualify for a low-interest loan.

Debt Settlement vs. Debt Consolidation Loans

It’s important to understand that a debt consolidation loan will not pay off your previous bills. It may simply provide you with a more effective means of dealing with them.

Debt Settlement Debt Consolidation Loan
Monthly Payment of Debt Reduced as a result of debt renegotiation Depending on the loan’s terms
Upfront Fees None If you want to transfer your credit card balance, you will be charged an origination fee as well as maybe some transfer costs.
Typical Program Length 2-5 years 2-5 years
Financial Benefits There is both short-term and long-term relief. Debt has been forgiven. Interest rates that are lower or fixed
Qualification Having a steady income. Unsecured debt of at least $10,000. In the case of secured loans, a good credit score, a good debt-to-income ratio, and home equity are all required.
Impact on Credit Score Significant, but not as terrible as bankruptcy under Chapter 7 or Chapter 13. Low. Long-term good influence after initial unfavorable impact.
Other considerations It takes at least three months to see visible progress. When you take out a secured loan, you’re putting your home on the line.

The Benefits and Drawbacks of Debt Consolidation

Pros

  • It streamlines debt repayment, making it more visible and manageable.
  • It does away with variable-rate loans in favor of a single fixed-rate, closed-ended liability.
  • It generates monthly savings due to lower interest rates.
  • It enables self-disciplined individuals to set up an emergency savings account.

Cons

  • You risk losing your home or car if you take out a secured loan.
  • It may lead some people to assume they have fixed their earlier debt problems when they haven’t.
  • If left active, paid-off credit cards may attract some people to make new purchases.
  • You’ll need a decent credit score to acquire a good interest rate on your debt consolidation loan. Banks and credit unions rarely lend to people who have credit ratings below 580.
  • It takes time to choose the finest financing attainable.
  • Origination costs may be charged on loans.
  • There could be a short-term negative impact on your credit score.

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Who Should Take Debt Consolidation Loans Into Account?

The following people are the best candidates for a debt consolidation loan:

  • With an excellent credit score and a good financial status. You won’t be able to receive a reasonable loan deal if your credit score is low. It makes no sense to combine your heavy debts into a single package that is considerably worse.
  • Responsible and well-behaved. The best course of action is to refrain from using the credit cards that you have already paid off with the loan. Some people find it useful to stash these credit cards somewhere out of the way, leaving only one card with a limited credit limit in their wallet in case of an emergency.

Are Debt Consolidation Loans Bad for Your Credit?

Debt consolidation loans, according to Nerdwallet.com, can result in a temporary drop in your credit score. The harsh query on your credit that comes with the technique causes this drop.

Debt consolidation can have a favorable long-term impact on your credit score if you follow the terms of the loan and maintain the discipline required to avoid using the merged credit cards.

What Are the Qualifications for Debt Consolidation Loans?

You must be in good financial standing to qualify for a debt consolidation loan. This entails the following:

  • You’ve had a consistent employment history.
  • You don’t pay too much in minimum debt payments each month. You are unlikely to qualify if you spend more than half of your salary on debt.
  • Your credit score satisfies the lender’s standards.
  • In the event of a secured loan, you have enough equity to provide.

Is a Debt Consolidation Loan Effective in Reducing Debt?

It can, under the correct circumstances, if you meet the eligibility standards, are disciplined, generate a sufficient salary, and have the mindset of getting out of debt.

Is Debt Consolidation a Better Choice for You?

Debt settlement focuses on lowering your total debt, whereas debt consolidation focuses on lowering the number of creditors you owe and the amount of interest you pay.

Cardinal Law Center negotiates with your creditors to get some of your debt erased through debt settlement. The outcomes of these conversations are frequently astonishing. Creditors are frequently prepared to lower balances by half, but it’s not uncommon for them to reduce a debt by up to 70%.

If you do not qualify for a debt consolidation loan, Cardinal Law Center debt settlement may be a better choice for you. If your financial position is truly dire, but you believe you can still make a partial payment to your creditors, you owe it to yourself to examine the advantages of debt settlement with Cardinal Law Center before taking an extreme move like bankruptcy.

The Cardinal Law Center is here to assist you. Thousands of pleased clients have benefited from our Certified Debt Specialists’ assistance in overcoming the burden of out-of-control debt. To find out if debt settlement is the best option for you, call 888-254-3702 and speak with one of our Certified Debt Specialists for a customised debt relief plan.

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