When the economic times become trying, it’s normal for people to be saddled with debts. Unlike in the past, getting a personal loan has become relatively easy thanks to multiple startups that provide financial products for people with different credit profiles.
However, this has also made people accumulate more debts than they can handle. When you have more than one debt, it’s easy to get into an ugly financial crisis. Debt consolidation can be a great way of tackling debts. Basically, your outstanding debts are combined into a single payment where you’ll be paying lower interest rates as well as manageable payments. Nevertheless, not all consolidation options are equal, and you must understand how to safely handle debt consolidations.
Understand the available options
Your credit profile can have a significant effect on the debt consolidation options available to you. Before settling on one, you need to carefully look into each option and see which suits you best.
If you have several credit cards with interest rates above 17%, you could transfer all the balances to a fresh card with a considerably lower credit card. In the long run, this will help you save money on the interests charged, and at the same time, you’ll be able to pay lower payments that are easily manageable. As long as your credit history is good, it’s possible to get a card with zero balance. To make the deal even better, you’ll have 18 months to pay back the entire balance.
A personal debt consolidation loan can be great since it comes with better interest rates. You’ll also know beforehand when you will break free from debt, and you can choose the number of years you want to pay the debts. Nevertheless, having good credit scores can help you get a low-interest rate.
Check the credit report.
It’s your duty to make sure your reports are reflecting your exact history without errors. If there is an error, you may fail to qualify for an attractive debt consolidation plan.
The best thing would be to dispute any errors you notice on the credit report. You may choose to submit a dispute form on the credit bureau website, but it’s better to write a formal letter with support documents attached.
Consider the effects of a consolidation plan on a credit score.
Debt consolidation can affect your credit profile. Basically, the lenders can see your activity and close your existing accounts until you are through the debt consolidation plan. Simultaneously, if you’ve transferred your balances to one card, you must avoid maxing the card.
This is because you can easily damage your scores since this accounts for 30% of your credit scores. Also, applying for a new cash loan would attract a hard credit check.
Pay attention to the contract details.
Before appending your signature on the agreement, you must carefully read the contract. If anything is unclear, it’s your right to ask for clarifications.
If you have some issues with the agreement, try to find someone unbiased to look at the document. While some things in an agreement may seem petty, they can cost you lots of money down the line.
Understand the basic differences between debt negotiation, debt consolidation, and debt management
With multiple service providers available online, it’s important to understand the strategies they use in dealing with debt.
In debt consolidation, you borrow an additional loan to settle your existing loans. Alternatively, a debt management program focuses on reducing your outstanding debts through a credit agency that negotiates with your creditors. The goal is to convince them to lower your interest rates and fees. With a debt negotiation arrangement, you pay a lower amount than you owe. In most cases, you only pay a percentage of the loan, and the remaining portion is written off.
Avoid credit insurance deals.
Some lenders will try their best to convince you to get credit insurance. You may also come across those who will imply that signing up for credit insurance will improve your chances of getting the application approved.
If you notice a lender is pushing you to get credit insurance, or they haven’t disclosed this cost, it’s time to flee. Basically, this will add unnecessary costs to the loan even though you’ll be getting minimal protection.
Pay off the outstanding debts within the shortest time possible.
Debt consolidation is designed to help you get a better repayment deal regarding interest rates and monthly payments. Nevertheless, spreading the payments over a long period may lead to higher costs.
If you want to keep the costs low, try to pay quickly, which could save you hundreds of dollars. Besides, you want to get off the hook as soon as possible.
Debt consolidation can be an appropriate way of eliminating debt. However, it’s not a decision that can be taken lightly. By finding out more information about the available options, you can make a sound decision to help you achieve your goals.