Individuals with multiple debts to pay each month find it difficult to keep up. As a result, they look for ways to get some relief. Fortunately, debt consolidation offers a method of paying these debts while making them more manageable. Before a consumer decides this is the right option for their needs, they need to understand the process, the available methods, the benefits and drawbacks, and more.
What is Debt Consolidation?
Debt consolidation involves the merging of debts into one financial product. Doing so allows the debtor to make one payment every month as opposed to several. Additionally, many men and women find their payment is lower when they use this method, as they got a better interest rate by merging their debts. What methods may debtors use to achieve this goal, and what options at National Debt Relief should consumers consider?
Balance Transfer Credit Cards
Consider obtaining a balance transfer credit card, one with an introductory annual percentage rate of zero. Many lenders offer these cards today and extend this introductory rate out 12 to 20 months. Transfer the existing debts to the new card and make it easier to manage the finances. Debtors must work to pay this debt off before the introductory period ends to save the maximum amount of money.
Make certain the combined amount of debt being transferred falls below the new card’s credit limit. Calculate any transfer fees assessed and carefully review the terms and conditions of the new card. For instance, the credit card provider might change one APR for balance transfers and another for new purchases. Consumers must have all information to ensure they don’t make a bad financial situation worse. Experts recommend reserving this card for existing debt and not using it for new purchases.
In fact, it’s best to get the card, transfer the debt, and put the old cards away. Don’t run up more debt on the cards that now have no balance, as this won’t help and could actually lead to more financial difficulties. However, don’t cancel these same cards, as that hurts the borrower’s credit score.
Debt Consolidation Loans
Debt consolidation loans are usually personal loans that a debtor gets. Men and women with a good credit score often find this method benefits them, as they lower the interest rate they are currently paying. This may reduce their overall debt by hundreds or thousands of dollars just by reducing the amount of interest paid over the life of the loan. However, men and women with less than stellar credit often find they cannot find a debt consolidation loan with terms better than what they have. These people must look into other debt consolidation options.
Debt Management Plans
Nonprofit credit counseling agencies offer debt management plans to individuals who find they are in over their heads. These programs help debtors manage their financial difficulties while showing them how to avoid similar problems in the future. Nevertheless, this option doesn’t work for everyone. Speak with a credit counselor to learn if this option will resolve your financial difficulties. If you determine the debt management plan is your best bet, you make payments to the credit counseling agency. The agency then makes payments to the creditors. However, they also handle other tasks on behalf of the debtor.
The agency contacts each creditor and attempts to negotiate lower monthly payments, fees, interest rates, or a combination of these items. Creditors don’t have to negotiate with the debtor or the credit counseling agency working on the debtor’s behalf, but many people will. They recognize the debtor can file for bankruptcy and want to get as much money from this individual as they can. This could be their best hope of doing so.
Credit counseling agencies make debtors cut up their credit cards when taking part in the program. They also prohibit participants from obtaining new credit. Creditors often withdraw from an agreement if they see a debtor has taken on new debt, so they must avoid this at all costs.
Many individuals associate debt settlement with debt management plans, but debt settlement actually comes with more risk. Consumers may attempt to settle the debt on their own or turn to a company to handle this task on their behalf. Those choosing the second option find they pay a fee to use the company’s services, and this fee could run 25 percent of the settled amount.
When settling the debt, consumers work with their creditors to come to an agreeable payment amount, one that is less than the outstanding balance owed. This process negatively impacts the credit score, and consumers must know they are required to report any forgiven debt to the IRS as income. The IRS then taxes this amount, making the settlement figure greater than stated in the agreement.
Many debt settlement providers find they can negotiate a settlement for 50 to 80 percent of the outstanding balance, but creditors only agree to this when the debtor has fallen behind on payments. This hurts their credit score and missed payments remain on their credit report for seven years. The accounts might go to collections during this period as well. For this reason, experts recommend debt settlement only be used as a last resort or when the debtor is already in collections or has become severely delinquent.
Debtors find they may borrow from their home equity or retirement account. However, both methods put assets at risk. A person who takes out a home equity loan and cannot make the payments as agreed may lose the home to foreclosure. Individuals who borrow from a 401(k) lose out on compounding interest and may be subject to income taxes on the withdrawn funds along with an early withdrawal penalty.
Consider all options if you find yourself drowning in debt. Solutions remain available if a person knows where to turn. However, consider the benefits and drawbacks of each option to ensure you select the one that best meets your needs. You don’t want to find that your efforts to get debt relief have left you in a precarious financial situation, one that is worse than the situation you were trying to resolve.