Debt consolidation is a financial strategy that makes bill paying easier, and you may even save money. Although there are pros and cons, as with any such strategy, this approach tends to work well for those who have a difficult time managing multiple bills, with their varying balances and due dates. Here’s how debt consolidation can simplify your credit problem – and more.
Debt Consolidation?
Debt consolidation calls for you to roll multiple high interest debts – usually from credit cards – into a single debt with a fixed payment, and hopefully better rate.
Rather than making monthly payments to each creditor, you make only one payment to one lender. For those who have a hard time keeping track of payments, and perhaps have even missed a payment because of it, debt consolidation is effective.
Who are Good Candidates for Debt Consolidation?
As we say, it’s a great strategy for those whose bills are piling up and have become unwieldy. However, good debt consolidation candidates must also have a workable plan for emerging from debt and staying out. If your debts are mostly comprised of medical bills, consolidation can buy you time to pay them off.
Most importantly, the strategy will not work if what got you in your situation – excessive spending – is not under control. This is paramount.
Methods of Consolidation
Home Equity
With this approach, the equity in your home is used to consolidate your obligations. The loan’s interest rate is sure to be low, and for good reason: your home is attached as collateral. This means that if you can’t make payments, your home will be foreclosed upon. So, we recommend this strategy only as a last resort.
There are similar risks associated with other debt consolidation loans that use your vehicle, life insurance, or retirement fund to get you the funds to consolidate. Further, it’s no small thing to put those up as collateral, as they might not be there when you need them.
Note that your term – the amount of time you have for loan repayment – could be longer than the terms for the obligations you’ve consolidated. Therefore, you may wind up shelling out more in total interest over the loan’s life than you would have on the individual debts, even with the lower payment. These are among debt consolidation tips for those living in Las Vegas. After all, many residents there are grappling with higher-than-average credit card utilization rates during a period of high inflation.
Balance Transfer Card and other Unsecured Loans
From time to time, credit card issuers offer what are known as balance transfer cards. Such cards offer zero-percent interest for a promotional period of around 12 to 18 months. If your credit qualifies you for one, you can shift your high-interest debt onto it, which simplifies bill paying and will save you money, owing to the lower rate.
Be careful, though: you must pay off the new card before the rate goes back up. Otherwise, you’re in another situation. So, if you employ this strategy, you must be able to make payments.
Note, too, that there may be a transfer fee, which will eat into some of your savings. Further, when your balance is down to zero, you must be able to reduce the temptation to start spending again. This is a real no-no and underscores the importance of budgeting and controlled spending.
Finally, a personal loan is possible without good credit. Yes, your credit problem will be simplified, but if you can’t get a low enough rate, consolidation may not be worthwhile. And again, no strategy will work unless you stop adding debt. That’s a certainty you must consider.
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