WHAT IS DEBT CONSOLIDATION AND WHY YOU SHOULD CONSIDER IT?

If you are reading this post, I would assume that you have, like most people, obtained 2-3 credit cards, incurred debt on all of them and are now getting tired of managing the payments on your cards every month – while trying to maintain a good credit score. Most US citizens find themselves in this situation at some point in their life, and it is nothing to worry about, provided you do something about it quickly.

The very fact that you are here implies that you have taken the first step towards improving your financial situation. Pat yourself on the back – because not many of us are able to acknowledge the murkiness of our economic situation until it is too late. And by the time we realize it, we get so much in debt with the ever increasing payments that the very thought of keeing up with the monthly payments becomes overwhelming.

If you are in such a situation, then you should make plans to get out of this situation quickly and not waste any time on it, and debt consolidation can prove to be a useful tool.

Debt Consolidation is the process of obtaining one bigger loan to clear off multiple smaller loans, like the debt accumulated by making purchases with mutiple credit cards. It is much better than making monthly payments for your credit cards for 2 reasons:

  1. Since you would now be making payments for a single loan, the payments become easier to manage.
  2. The monthly payment, as well as the amount of interest you end up paying for the debt would be less in most cases (as other forms of loan typically carry a lesser interest rate than credit card APR).

How can you arrange the money for debt consolidation?

If you already have a good credit score and are gainfully employed, you could consider the following options:

  1. Check with your employer if they could make an advance payment on your salary – Some employers provide salary advances with zero interest, and even when interest is charged, it is almost in line or lower than the interest rate for personal loans making it a much better option when compared to monthly credit card payments. Moreover, the employers do not usually charge any additional fees or processing charges when you apply for an advance loan, so it is even better than a personal loan.
  2. Check with your family or friends if they can front the money to clear your smaller debts – If you take this route, make sure you create a written agreement with the terms of the loan and abide by them in the most professional manner you can. Not having a payment schedule, or not following a pre-defined schedule might create a rift between you and the lender and cause stress in your relationship with the lender.
  3. Approach your bank and ask for a personal loan – The terms or repayment for personal loan are usually much better than credit card debt as they often carry lesser interest charges.
  4. Obtain a loan on your 401(k) Plan.
  5. Obtain a loan from your bank on your bank, insurance company, or credit union by pledging:
    • Your deposits, bonds, stock investments or insurance plans
    • Your house (HELOC), car, or other assets.
  6. Obtain a loan from peer-to-peer lending platforms such as Peerform, Upstart, Prosper or Payoff
  7. Obtain a loan from private finance companies or private individuals.

Debt consolidation, however, comes its own disadvantages:

  1. For starters, getting a bigger loan to clear off smaller credit card debts is bound to lower your credit score, at least in the inital days. You would be able to improve your credit score over time by sticking with the payment schedule for the loan and refraining from incurring additional debt.
  2. If you do not have a good credit score, or if you are out seeking non-collateral loans (i.e., loan without pledging any asset), then the rate of interest could be higher.
  3. You may not be able to include some types of loans, such as student loans, when consolidating your debt. Please seek the assistance of your bank, or another qualified financial advisor to find out what all loans can be cleared using debt consolidation.
  4. There are often fees and charges involved in the process of securing a loan.
  5. If you are obtaining a loan on your 401(k) plan, or by pledging your deposits, bonds, insurance policies or stock investments, then their long-term returns may be reduced.

If you do not have a good credit history, or if you are unable to pledge any assets as collateral, it is best to engage the services of a debt consolidation services company as they can negotaiate with banks and other financial companies on your behalf and help you secure a loan with better payment options.