Personal Debt Consolidation Options
There are personal debt consolidation options that allow, for millions of Americans in debt, a way to retake control of their financial future. How? By combining (consolidating) unsecured debts, like credit cards, medical bills and personal loans into one loan, that can result in reducing debt financing costs. Consumer debt consolidation options can offer a consumer various benefits but other factors should also be considered before deciding on this option. For those struggling with debt, these personal debt consolidation options can result in a major improvement in their future life.
Here are a list of personal debt consolidation options together with their potential benefits and drawbacks.
What Is Personal Debt Consolidation?
Personal debt consolidation (often referred to as debt management) is a process of combining your unsecured debts into a single, larger debt (loan) with a more favorable interest rate, payment terms and lower monthly payment. Examples of unsecured debts that can be consolidated include credit cards, personal loans, medical bills and some types of student loans. The goal of debt consolidation is to improve your financial situation by lowering your TOTAL costs of financing your debts.
Here are the basic things to know about personal debt consolidation:
- Debt Consolidation Is A Refinanced Loan With Extended Repayment Terms.
- Extended Repayment Terms Mean Longer In Debt.
- A Lower Interest Rate Isn’t A Guarantee When Consolidating.
- Debt Consolidation Is Not Debt Elimination.
- Debt Consolidation May Increase Your Total Debt Obligations
Personal Debt Consolidation Is Simple
Personal debt consolidation is simple in principle. You borrow money and pay off your unsecured debts and remain with one, often larger debt, to pay off. Ideally, this single payment will have a lower interest rate than your unsecured debts, so you’d pay less in interest while paying down the debt.
But deciding where to borrow the money from, and getting approved for the loan or arrangement, is where it gets complicated and each has its pros and cons.
1 – personal Debt counseling
Pros: This typically involves you making a single payment to the credit counseling company, which in turn pays each of your creditors. Sometimes, they can negotiate lower interest rates or monthly payments on your behalf.
Cons: There may be a small fee to get set up as well as a monthly service fee. Normally you will be required to close your credit cards once paid off. (Good and bad on your credit report.)
2 – Unsecured Personal Loan
Pros: The interest rate should be lower than your unsecured debts (particularly if you have credit card debts) and you may have several years to pay off the debt resulting in a lower monthly payment.
Cons: Some lenders charge an origination fee (cost) for the personal loan. If your credit is poor, you might not be approved for a money-saving interest rate loan.
3 – balance transfer credit card
Pros: Lender offers introductory 0% rate transfer credit cards. You can avoid paying interest entirely if you repay your unsecured debts during the promotional period.
Cons: The transfer credit card may have lender fees (fixed or percentage) on the amounts you transfer. Also, the transfer credit card has a credit limit which may not accommodate all your unsecured debts and fees You would then not have consolidated all your unsecured debts into one loan.
4 – Secured Personal Loan
Pros: The interest rate on home and auto loans should be lower than your unsecured debts, because they are loans secured by property. Mortgage interest payments usually offer personal tax advantages as well.
Cons: While the lender has less risk extending you a personal loan due to the property collateral, you may need good credit to qualify for a low interest rate. If you’re unable to pay off the personal loan, you risk losing your home or vehicle. Taking out a secured loan to payoff unsecured loans is of high risk and probably not a good decision.
5 – Loan From Family/Friend
Pros: There’s no credit check. You may be able to get a lower interest rate and repayment terms than a financial institution will offer you.
Cons: You place your personal relationship and family/friend’s finances at risk if your are unable to repay the loan.
Personal Debt Consolidation Reality
Simply put, when you consolidate your debts , you are only treating the symptoms of your money problems. You don’t get to the core of why you have financial issues in the first place. You don’t need to consolidate your bills, but rather you need to delete them by paying them off. To do that, you have to change the way you view your life and the need for debt.
The solution isn’t a magical, quick fix. They don’t exist. It likely won’t come in the form of a better interest rate or another loan. Rather you need to radically change your thought and manner of dealing with debt. You need to make a plan for how you manage your money and that requires personal discipline.
Conclusion - Personal Debt Consolidation Options
An overview of personal debt consolidation and options are recommended based on their pros and cons. These include 1) Personal Debt Counseling; 2) Unsecured Personal Loan; 3) Balance Transfer Card; 4) Secured Personal Loan and 5) Loan From Family/Friend. Finally, comments about the reality of consumer debt consolidation to help you get out of debt and on the path towards financial freedom.
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