The inability to pay your various bills on time can cause a feeling of desperation. Some would resort to additional borrowing to make partial payments to the outstanding bills, only to find themselves deeper in debt. Uncontrolled borrowing brings a person to a situation where there seems to be no way out. It is not uncommon to hear people committing suicide because of the hopelessness of their situation.
Consumers should not feel that desperate, no matter how deep in debt they are. There are viable solutions out there. All you have to do is seek expert’s advice in order to find the best solution to the problem. Debt counselors often recommend debt consolidation as the most viable solution to the problem of indebtedness.
Debt consolidation is a form of debt refinancing where the consumer takes out one loan in order to pay off the other loans. This is the remedy used by individuals with heavy consumer debt. The debt consolidation process involves securing a lower overall interest rate for the entire debt load and offers the convenience of paying only one loan.
Debt consolidation has become a large industry in the US. Millions of Americans have refinanced their consumer debt in order to escape the high-interest rates their various creditors are charging them. People’s reliance on the credit card has resulted in large amounts of debts that charge high-interest rates.
Debt consolidation has different forms. It could refer to combining multiple loans or credit card debts into a single payment. Another form of debt consolidation is refinancing your loans or credit card debts into lower interest rates without the need for combining the different loans into a single payment. Several loans could be refinanced without consolidating them and it is also possible to consolidate several loans without refinancing them.
The most common form of debt consolidation that many consumers consider is the combination of consolidation and refinancing. The most popular form of this type of debt consolidation is the traditional debt consolidation loan. The consumer applies for this loan and uses the proceeds of the loan to pay off all their debts. The consume will then be making payment for only a single loan, at a much lower interest rate. The aim here is to make the consumer pay a smaller interest rate for a single loan instead of paying high-interest rates for multiple loans. This will give the consumer the much-needed chance of getting back on his feet again.
If the consumer is a homeowner, he has few more options to consolidate his debt. He can take out a home equity line of credit against his house. A home equity line of credit simply means that he is borrowing against the value of the home equity. The homeowner can use the proceeds of the equity line of credit to pay off his various high-interest debts or loans, leaving him with making only one payment for his housing loan, which includes the equity line of credit. Another option for a consumer who owns a house is to refinance his home and use the extra money from the mortgage to pay for his various existing debts. The two alternatives available to a consumer homeowner will only work when there is a good amount of equity tied up in the home.
The best type of debt consolidation that may be available to a consumer depends on his debt situation.
Types of Debt that People Consolidate
In the modern financial world today, there are various financial products that are available to help people make their lives easy and convenient. These financial products help people save, invest, buy insurance, or obtain a mortgage. Banks, financial institutions, stock brokerages, credit card companies, and government entities issue financial products. The financial products include credit cards, loans, stocks, bonds, treasury bills, and much more. The ordinary people usually use bank loans and credit cards to provide them with money whenever they run short or when they have a big project in mind and they do not have savings to finance it.
Credit cards are the most convenient financial product that is available to most people. Anybody who has a good credit rating has the opportunity to get a credit card, which he can use to purchase goods even when he has no available cash. Credit card debts are payable in installment, subject to the payment of interest rate.
It is common for a person to have several credit cards under his name. A person can make charges on his credit cards as long as there is available credit balance. Undisciplined borrowers are prone to max out the limits of their credit cards. Credit card debts have very high interest rates and will be difficult to escape once you get hooked into it. Credit card debts are the most common type of debt that people consolidate.
Next to the credit card debts, people also tend to accumulate bank loans, auto loans, business loans, and mortgages. When one is saddled with bills for all these types of loans, it seems that the only way out is to consolidate all the debts into a single one.
Student loans are also often consolidated, especially when one has several private student loans. Private student loans are much easier to consolidate. Student loans from the government face more restrictions when it comes to consolidation, and students lose certain protections when they take out a private consolidation loan to pay off government loans. The only time government student loan can be consolidated is when the individual has multiple government student loans. They can be consolidated into a single student loan payment to make the payment structure a lot easier.
When to Consolidate?
When a person is juggling several creditors in order to pay off a significant amount of debt, debt consolidation can keep him on track to getting his head above water and be able to breathe. This option is a lot better than outright applying for bankruptcy, which is usually the last resort of those people who cannot get out of debt.
Debt consolidation will be able to preserve the consumer’s credit score and avoid dire financial situations that get even more complicated when he files for bankruptcy. The bankruptcy proceedings will leave the person’s credit standing in bad shape for many years to come.
A personal loan to consolidate all the debts will significantly reduce a person’s financial burden but the person must be careful in making a choice of the lender he will be working with. The lender consumer should be accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Choosing just any lender to consolidate a person’s various debts will not guarantee that his financial burden will be reduced. The consumer must choose a lender with a solid reputation in debt consolidation. Some consumers get so desperate of their situation that they will deal with any lender who will listen to them. A consumer must first study everything he could find about debt relief service before agreeing to deal with a lender who handles debt consolidation.
Importance of Credit Score
A person’s credit score is the numerical expression of the analysis of his credit files. A credit score represents the creditworthiness of an individual. It primarily based on the credit report information provided by the credit bureaus.
Lenders, such as credit card companies and banks, use the credit scores to weight the risk of lending money to a borrower. A credit score is the basis for making decisions on whether a loan shall be granted. The lenders in determining the customers that will likely bring in the most revenue also use it. Credit card companies first check the credit score of an applicant before granting credits.
A credit score is widely used in the financial world. It is used not only by banks and credit card companies but also by landlords before agreeing to lease the property, mobile phone companies before accepting clients, insurance companies, and government offices. Even online lenders, such as payday loan companies, refer to the credit score of the loan applicants before granting a loan. Making financial transactions will be a lot easy for people with good credit scores.
A credit score is important in making a decision to consolidate various debts. People who made serious mistakes in their credit history will be haunted for many years of the consequences – it will be difficult for them to get a loan. The credit score will dictate how easy it is to consolidate loans, whether by refinancing existing loans or getting a single loan to pay off the various loans. The better the credit score is, the lower interest rate he will be getting for his new loan.
Preparing for Consolidation
When a consumer starts considering consolidation as an option to his financial mess, he must begin by preparing his credit score. The consumer must check his credit score and if it turns out to very low, he should take steps to correct or improve it. Improving one’s credit score will put a person in a position where he is able to get better interest rate and easily access consolidation loans.
When a consumer is seriously thinking of consolidating his debts, he should take steps to improve his credit score. The first area to start will be the credit card debts. Credit card debts have a great impact on a person’s credit score. A person with very high credit card balance tends to have a low credit score. The consumer can pay off the balance of his credit card bills or pay part of the balances will positively impact his credit score. Paying off the credit card debts will not immediately show any impact on the person’s credit score because it takes several weeks or months before the credit report is updated.
It is not uncommon to have mistakes in the credit reports. The consumer must check his credit report for any mistake. If he notices any mistake, the same must be reported to the credit bureau that made the report for correction. The consumer must be able to show documents to prove his claims of mistakes in the credit report.
Being patient will also help improve a person’s credit score. Negative credit reports are automatically deleted after seven years. For example, a default in payment will stay on the person’s credit report for seven years, after which it is deleted. Waiting for a person’s bad records in the credit to expire is a way of boosting his credit score.
Ways to Consolidate
There are good places to go when a person is considering debt consolidation to solve his financial miseries. The following are good institutions that can grant debt consolidation loans:
- Credit Unions – The members own a credit union, which is why getting a loan is easier than getting one from the bank. A consumer can get a consolidation loan when he meets the requirements of the credit union. Most credit unions have requirements for members. It is important that a person who wants to consolidate will do his research to find out the best credit union that will accept him as a member.
- Refinancing the home – A person who cannot get membership in a credit union can consolidate his loans through home refinancing. It will be easier to apply for a consolidation loan when a person is a homeowner because he will be using the equity of his home as the security for the loan. The disadvantage of using home refinancing to pay off your various loans is that it is secured by the home, while credit card debts are unsecured.
- Private loans – A private loan is a loan issued by an investor or a private individual. This is widely used by people because of the less-stringent requirements, especially if it is to be issued by a family member or a friend.
Working with American Debt Consolidation
American Debt Consolidation helps consumers get out of their debt situation by speaking directly to the creditors and arranging a plan to reduce the consumer’s debt amount. While dealing with creditors is an intimidating task for many individuals, American Debt Consolidation has professional debt service speak on the behalf of the consumer. This will let the creditors know that a person is really serious about taking control of his finances.
The negotiators of American Debt Consolidation will let the creditors know that the client is very close to filing bankruptcy, which will result in the creditors not getting a single cent from the borrower. The creditors would rather collect a small amount from the consumer instead of losing everything in bankruptcy proceedings.
Financial Advisor, DCL
Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.
Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.
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