All the Questions That You Wanted to Ask Regarding Debt Consolidation but Never Did

A recent study of savings habits, published on https://www.huffingtonpost.in, revealed a shocking fact; nearly one-third of Americans had more credit card debt than savings. Another survey by the Center for Financial Services Innovation discovered that some 72% of Americans were either struggling to pay some or all of their monthly expenses. With the financial health of so many Americans so poor, it is small wonder that debt consolidation has emerged as one of the most popular ways of getting back some control over their finances. However, debt consolidation is not necessarily beneficial for everyone, and therefore, it is necessary to know all the vital aspects to make an informed decision. Some of the most commonly asked questions are regarding debt consolidation:

What Is Debt Consolidation?

In its simplest form, debt consolidation entails adding up all your unsecured debt and paying them off with a new loan thereby ending up with only the new loan instead of multiple debts. All the individual loans are in effect consolidated into a single name, which is why the method is called debt consolidation. Debt consolidation works only with unsecured debt because loans taken for the purchase of property or expensive assets like cars are backed by the asset itself as collateral.

What Are the Major Benefits of Debt Consolidation?

Debt consolidation has multiple advantages. Firstly, you no longer have to monitor multiple credit cards or personal loans individually so that the minimum due or the EMI is paid on the due date and you are not levied penalties for late payments adding to your financial woes. In short, the management of debt becomes easier because now you have only one loan outstanding and only one payment every month to make. Secondly, by escaping from the clutches of the steep APRs that credit cards are so infamous for, you can save a lot in interest expense as debt consolidation loans typically carry a lesser rate of interest for those with good credit scores. Also, by consolidating debt, you actually start the process of repairing your credit history because all your credit cards have nil balances and the credit utilization ratio is zero. When you keep paying off the debt consolidation loan without missing a payment date, it also sends out a signal to the credit rating bureaus that you are financially stable. Lastly, you can considerably ease the stress of trying to get enough money every month to pay off the minimum dues by extending the tenor of the consolidation loan thus making the repayment more affordable.

Do You Have to Pay Any Charges for Consolidating Debt?

Apart from the interest, typically, you will need to pay an application fee by whatever name to avail of the debt consolidation loan. This can range from one percent to as high as five percent of the loan amount unless you are taking a loan from your retirement funds. Even if you are using a zero percent balance transfer offer, the card issuer will charge a processing fee of three to five percent of the amount transferred. Apart from a personal loan taken from a bank of a private online lender like nationaldebtrelief.com, other channels like a home equity line of credit and balance transfers may charge an annual fee. If you miss making a payment, you will be charged late payment fees that sometimes can be as high a $100 for balance transfers. If you want to pay off the loan, you can be charged a fee for premature payment, typically, 1% of the due amount and a flat fee of $400-500 for a HELOC termination.

Can You Undertake Debt Consolidation on Your Own?

Despite the strident advertising by private debt relief companies, it is quite possible for you to undertake debt consolidation on your own. For example, if you have received a zero percent balance transfer offer from a credit card company, all you need to do fill up the application form and you will receive a new credit card in a matter of weeks and your due on the other cards will have been settled by the card company. Of course, you need to make sure that the new card issuer is not the same as the card on which you have a balance. For that matter, you can even apply for a personal loan from a bank or a private lender on your own and use the loan proceeds to pay off all your credit cards and other high-interest bearing personal loans.

What Is the Role of Debt Consolidation Companies?

Debt consolidation companies not only give you the new loan but also help you to review your credit scores as well as your income and debt servicing capacity. Rather than using them just for the vanilla loans, you can think about employing their services for debt settlement if your outstanding debt is so high that there is no possibility of your being able to pay it back. They can negotiate with your creditors to reduce the amount of debt citing the possibility of client bankruptcy if they do not agree, in which case they would get nothing back. Debt settlement companies will charge hefty fees, usually a percent of the amount by which the debts are reduced.

What Is the Impact of Debt Consolidation on The Credit Score?

To begin with, the new loan that you have taken will impact your credit score, however, with the other cards becoming freed up; the credit utilization ratio will be zero and act to boost your credit score. Further, when you embark on debt consolidation, you have the opportunity of making the loan more affordable by extending the loan period. This ensures that you do not miss even a single payment. Additionally, because you are saving substantially on the interest expense, you can pay off the debt faster, thereby helping to improve your credit score. Over the period that you pay off your debt in full, you should experience a significant improvement in your credit score.

Conclusion

For people who are losing their sleep trying to manage credit card debt, it can be extremely worthwhile consolidating the debt. Not only do you make your financial life easier, reduce the stress of trying to find enough money to make the monthly payments but also save a lot of interest expense and repair your damaged credit score.