Before you let the stress of excessive debt drag you down, you need to know you do have viable ways to re-establish some level of financial stability. Remember, any thought of bankruptcy should be deferred. Why? The damage bankruptcy could do to your credit rating and immediate financial future makes it a last resort debt relief option. We recommend that you consider debt consolidation as a more viable option. Before considering, take a look at the information below to become familiar with how it works.
What is debt consolidation?
Debt consolidation is the process where you pay off high-interest debt (credit cards, personal loans) with funds from a lower-rate debt consolidation loan. All of those balances are zeroed out and you pay one fixed monthly payment for the duration of the loan term. Typically, since you get a lower rate, your money goes farther and you can pay down the new loan much faster. The loan works well for people who still have a reasonably good credit score and enough income or cash flow to manage their existing debt. Debt consolidation allows borrowers to reorganize their unsecured debt in a manner that makes it easier for them to manage.
How can you benefit from a debt consolidation loan?
Let's assume the source of your current financial difficulties is excessive credit card debt. Let's further assume that some, or all, of your credit cards carry an APR of between 14% and 24%. It can feel overwhelming for several reasons. First, the sheer number of monthly payments you have to make to credit card companies can be very frustrating and time-consuming. The second issue you are likely facing is a huge drain on your cash flow. The inefficiency of paying so much debt with high-interest rates could eventually leave you feeling like you are barely treading water. With the right debt consolidation loan, you could immediately address these issues. Here are four ways you could benefit from a debt consolidation loan under the aforementioned scenario:
1. Convenience. You could be paying your utilities, mortgage/rent payment, insurance, and car payment along with having to cut checks for half a dozen or more credit cards. With a debt consolidation loan, you could roll all of your credit card debt into one loan, effectively cutting your bookkeeping efforts in half.
2. Lower interest rate. High-interest rates will make it very difficult for you to put a dent in your credit card debt if you can only afford to make minimum payments every month. If your credit is in reasonably good shape, you would most likely qualify for a debt consolidation loan with a manageable interest rate. If the rate is low enough, more of your payments would be going towards paying down your principle and less towards interest.
3. Lowering your payment. Even at minimum payments only, the amount you would be paying each month under the aforementioned scenario could be substantial. With a lower interest rate, a debt consolidation loan could put you in a position to decrease your payment each month. You can use that cash flow savings to accelerate your payments on your debt consolidation loan or put it in savings for a rainy day.
4. Save your credit score. Growing credit card debt is like putting air in a balloon. Too much air will eventually cause the balloon to pop. If you don't get your unsecured debt under control, you will run the risk of damaging your credit score and financial stability. A debt consolidation loan could serve to make that issue less likely to happen.
Debt Consolidation Options
If you are interested in consolidating your unsecured debt, you have a couple of different options worth considering. First, you could try to secure a zero-interest rate credit card that will cut your interest costs to nothing for at least 12 to 18 months. During that time, your entire payment would go against the principle. This option is available if you have a good credit score. The biggest issue with this option is you would still have credit card debt. You might even have available credit, which might tempt you to go even further into debt before you make your first payment on the new card.
Your best option would be to get a fixed-rate debt consolidation loan. By doing so, you would know exactly how much your monthly payment will be, and you won't have to worry about your interest rate changing from month to month. As long as you make your monthly payments on time, there is a very good chance you will find your debt has become much more manageable.
Please contact us at Truliant Federal Credit Union if you have questions or need assistance securing a debt consolidation loan – we offer a Debt180° loan and home equity options to help you, depending on your financial situation.