It’s not possible to anticipate each and every event in life due to uncertainty. At times, expensive events happen and unexpected bills pop up. As a result, a lot of people find themselves deep in debt. Statistics indicate that on average, the common American citizen owes about $5,048 in credit card debt. As time passes, you accrue several loans from different lenders, and it becomes tricky to keep track of these loans. Having several debts that you cannot keep up with combined with the fact that the different debts sum up to a huge amount can lead someone to declaring bankruptcy or to the risk of insolvency. Considering the high monthly installments and interest rates, settling a debt or dealing with debt can be a great challenge. However, there is always a solution to most problems and in this case, debt consolidation comes in handy.
Debt consolidation, as the name suggests, fuses or unifies your debts into a single loan after which you have to pay a single installment every month for the consolidated loan’s term period. Debt consolidation streamlines your debt responsibilities which then allows you to manage your money much more efficiently. It is important to note that debt consolidation and debt management are two completely different concepts. Under debt consolidation, you take a new loan to pay off several pre-existing debts. Debt management entails bargaining for an affordable monthly payment with your current creditors.
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Debt Consolidation: How Does it Work?
Debt consolidation involves moving all loans that meet certain criteria, or a significant amount of such loans, into a single loan. The next step involves closing down previous loan arrangements, credit card debts, and all other qualifying debts, after which you start paying one single monthly installment towards the repayment of your new loan to your new creditor.
These loans may hurt your credit score, but on the other hand, they may help lower interest rate and reduce the amount that you have to pay per month as an installment for the loan. A debt consolidation loan also helps reduce or eliminate the stress of having to keep up with multiple loans and debts.
Debt consolidation loans allow people to consolidate different types of debts. The most common types of loans (debts) that usually qualify for debt consolidation include:
Personal Loans- Most individuals in America have multiple personal loans from different lenders. Considering today’s tough economic conditions and financial challenges, more often than not people find it difficult to keep up with monthly loan repayments. A debt consolidation loans allow borrowers to unite multiple personal loans, or personal loans and other types of eligible loans into one single loan that comes with a reduced interest rate and reduced monthly loan repayments.
Credit Card Debt- Most Credit card debts usually qualify for debt consolidation.
Other types of debts that are eligible for debt consolidation include private loans, charge card debts and utility debts.
How Do You Know if You Are Eligible For Debt Consolidation?
Debt consolidation can benefit most people. However, it may not be suitable for everyone. When should you go for a debt consolidation loan?
If you find yourself struggling with monthly loan repayments. If you own multiple credit cards, and you’re approaching your credit limit (or if you have reached your credit limit) then you are a candidate for debt consolidation. In such situations, debt consolidation may help reduce the number of debts and repayments to allow for easier money management.
Concerns about equity in your residential or commercial property. If you are having trouble keeping up with high-interest rates on your home loan plan, debt consolidation should help ease the situation.
No Reduction in Principal. If there is no significant reduction of principal as you continue to pay your monthly repayments, you should consider consolidating your home loan to land a better deal with a reduced interest rate.
Qualifying for a debt consolidation loan requires you to have a good credit score. Before you set out to look for a consolidated loan provider, it is advisable first to determine the total amount of debts you intend to consolidate. It is wise to inquire about qualifications for such loans before applying to avoid wasting your time because you may apply for a loan only to find out that you do not qualify for the loan.
Take Time to Consider The Following
It is important to choose a suitable plan with the right credit provider, make sure you consider the following things:
Fees Charged: There are always fees involved in the process of debt consolidation. They include loan set up and maintenance fees. Find the amount you need to pay for fees charged and then find out if there are any hidden charges (HINT: There most likely is).
Loan Provider’s Reputation: Always ensure that your debt consolidation loan provider is a reputable institution. Reputable institutions are regulated and registered by bodies such as The National Foundation for Credit Counseling, or The Association of Independent Credit Counseling Agencies.
Customer Service: Transparency and the willingness to listen to your questions and address your concerns are what constitute good customer service. They should offer support to customers when they need help.
Relevant Additional Services: Creditors with additional services such as debt counselling and debt management that may prove useful to you as a customer is always an additional benefit.
Certifications and Accreditation: The prospective provider should have accreditation from authentic and well-established organisations. Examples of such organisations are International Organization for Standardization and Better Business Bureau.
Profit Versus Non-Profit Lender: The latter demands lower fees than profit providers. This piece of information may influence your choice of the loan provider.
Loan Terms and Associated Conditions: Always check the terms they offer their consolidation loans clients
Risks That Come With Debt Consolidation
Debt consolidation is worth your time only when it results in some benefit such as reduced interest rates. The risks associated with debt consolidation include:
- Increased the overall cost of your loan. To reduce your monthly repayments, the provider has to stretch your consolidated loan over a long span of time. Taking into account that you have to pay interest for as long as you are in debt, this results in an increased overall cost of your loan.
- There might be hidden charges, or new charges may be introduced in your loan agreement. Late payment fines and changes in the economy usually end up affecting your loan. Remember, you have to pay some sort of fee for paying off your pre-existing loans early.
- The debt consolidation loan provider may increase interest rates in the future.
- If you leverage your home’s equity to consolidate loans and at some point, you are unable to make repayments due to unforeseen events (if someone retires or loses their job), you may end up losing your home.
Here Are The 5 Best Debt Consolidation Companies In the US
Consolidated Credit– This is a well-established company that offers debt and credit counselling services. They have over 20 years business experience. They provide debt management, personal finances advice, credit counselling, credit card debt solutions and debt consolidation.
National Debt Relief– If you are struggling with debt, National Debt Relief may offer you a solution to your debt problem. This company is based in New York where they offer services in the finance industry. They help individuals and businesses with medical bills, repossessions, reducing business debt and credit card debts. Their services lean towards debt relief as opposed to debt consolidation, but they still do a great job with debt consolidation.
Freedom Debt Relief– This company is based in San Mateo, California. The company focuses on debt management programs. The company assists clients to manage their debt by assessing each client’s liabilities, after which they help the clients come up with a savings plan. Once the savings plan is in place, they negotiate with creditors on the client’s behalf. They do not charge a monthly fee but rather they charge clients a certain percentage based on how much the client saves in their debt repayment plan. This is a great business strategy because it’s a win-win for both parties involved.
Debtwave– This is a well-established company having been in business since 2001. They offer services in debt management as well as debt consolidation plans. They aim at reducing interest rates as well as monthly repayments on loans and other types of debts owed by their clientele.
PDH Premier– Since 2008, PDH Premier has been one of the best debt consolidation and counselling services provider in the US. They evaluate each client’s unique situation and tailor a suitable solution to each client’s debt situation for optimal results.
Debt Consolidation is a viable option for those looking for a way out of debt. However, you should assess your current situation before settling for debt consolidation. Also, consult with local financial experts to see if they think consolidation is right for you.