Debt Consolidation: A Panacea Or A Costly Credit Card Debt Alternative?
The number of people who are unable to cope with their credit card
payments is on the rise. Many people face such situation the first time
in their lives and feel nothing, but panic. While inability to honor
your current obligations is quite unpleasant, there are options to
address it effectively.
Debt Consolidation Is Growing In Popularity
Debt consolidation is the most utilized option to manage intolerable
credit card debt. As more and more people fall behind on their debt
payments with recent economic downfall, debt consolidation is getting
more and more popular. The most common reason why people choose debt
consolidation loans is smaller monthly payments, allowing managing debt
easier. Another important reason to consolidate your credit card
balances is that debt consolidation loans do not damage your credit, as
your credit card balances drop to zero, and a new loan appears on your
credit record. In fact, many consumers see a raise in their credit
scores, as their decreased revolving balances affect their credit
favorably in the eyes of the lenders.
The Way Debt Consolidation Loans Work
The way debt consolidation works is that a borrower takes out a loan,
usually secured by home equity, that replaces the credit card debt. Such
loans typically feature longer durations, sometimes up to 15 years, and
have smaller interest rates. Both of these factors help the monthly
payment to go down significantly, allowing for better debt management.
As most debt consolidation loans are secured, the credit score of the
borrower plays insignificant role in loan-granting decision, thus making
them a great choice for borrowers with bad credit.
Debt Consolidation Loans Have Few Drawbacks To Consider
While debt consolidation loans may seem great to many consumers looking
to get out of overwhelming credit card debt, they do have one
significant drawback – high borrowing cost. While both, the monthly
payments and the interest rates are lower, the amount of interest that
lenders collect from borrowers is quite significant because debt
consolidation loans have lengthy durations. While these may be somewhat
offset by tax deductions in case you take out a second or third mortgage
to consolidate your debts, they are still something to consider when
planning your personal finances. In addition, many debt consolidation
loans feature origination fees and points, adding up to the list of your
borrowing costs.
Alternative Debt Consolidation Options
There are many alternatives to debt consolidation loans, with some
requiring serious financial discipline or help of a financial advisor.
In case your credit card debt is not completely out of hand, you may
utilize windfall method or a self-managed debt reduction plan. Windfall
method is very simple: whenever you receive money that you did not
expect to receive or did not count on, you should use it to pay down
your debts. This money may come from employer bonus, overtime hours, tax
return, inheritance, and so forth. Self-managed debt reduction plan is a
more challenging endeavor. It requires a consumer to analyze the
current state of finances and to budget them in such a manner that would
allow for accelerated debt repayment.
It very often requires giving up costly habits, such as exchanging an
everyday morning latte for an extra $100 in credit card payments per
month. In addition to above, there are a number of different programs
offered by nonprofit debt consolidation agencies. Such programs usually
restructure your debt by renegotiating repayment terms with your lenders
without the need for a debt consolidation loan.
