Debt consolidation is definitely an option to avoid financial ruin such as bankruptcy. It can be good for individuals who are looking for a way of getting out of debt but who are unable to do this by paying their bills as agreed. The reason behind being unable to pay those bills is less important than finding a means to get out of debt. If you are a consumer searching for solutions, debt consolidation could be an option. However, there are several options to take into consideration.
In these examples, think about the pros and cons of the action. Realize that not everybody will qualify for each approach of debt consolidation, but you should think about all options until you find the proper solution for your debt issues.
Debt Consolidation Through Personal Loans
Personal loans in many cases are unsecured loans given to individuals with good or better credit scores, steady income and also the means to pay back the loan. The borrower obtains a personal loan, uses the proceeds of the loan to pay back the individual outstanding debts and works to pay back the bigger personal loan.
- Applying for a personal loan can often be difficult when you have bad credit.
- If you meet the requirements, making one payment per month is likely to be less complicated than having to pay quite a few lenders at one time.
- Personal loans is generally available from financial institutions, lending institutions, hard moneylenders or private parties, such as best friends and family.
- You still have to repay the total debt amount.
The largest risk to personal loans for debt consolidation would be that the borrower settles all of his or her debt with the loan, which can often leave the borrower at risk for accumulating more debt. If he pays off three credit cards, for example, using the proceeds of the personal loan, those three credit cards will have a clear balance. Some borrowers may make the mistake of running up those balances once again.
Debt Consolidation Through Credit Cards
People who have a good credit score might be able to acquire a new credit card that has a larger available credit limit and use the proceeds from that credit card to settle other debts. This is commonly called a balance transfer. In this kind of scenario, the debtor agrees to a different personal line of credit (or requests an existing lender to increase the credit limit of an existing loan,) and after that consolidates all debt onto one loan.
- Acquiring a credit card which has a high borrowing limit could be difficult for those that have low credit scores.
- Balance transfers usually come with fees. Not all cards allow for them.
- If the debtor secures a credit card that has a low Rate for the introductory period, paying off all debt in that period might decrease his / her interest fees significantly. Or else, consider the interest rate of the loan after the introductory period.
Some credit card providers recommend debt consolidation for borrowers. Ask for a specific credit card providing these benefits. Think about the constraints, like the accessibility to such credit cards and also the fees enforced by lenders.
Debt Consolidation Through Home Loan Refinance
A different way to use debt consolidation is via a home loan refinancing or a home equity loan. In this particular loan, the debtor taps into the equity in their home to pay off their debts. This method is acceptable but dangerous. In order to qualify, you will have to have equity in the home, which is the amount of value of your property minus any loans on that property. For example, if your home is worth $200,000 and your mortgage is only $125,000, you possess up to $75,000 in equity to borrow against.
- Paying off unsecured debt through the use of a home loan could place your home in danger if you fail to repay the debt. You can lose your property for defaulting.
- The interest rate on these loans is very low compared to other kinds of loans, like unsecured credit cards. Qualifying for the loan is generally easier than getting unsecured credit as well.
Most individuals lack equity, or enough of it, in their home to use to pay down their debt. With many properties losing value over the last few years, this method may not be suitable to all borrowers. You have to get a household assessment to determine if you qualify for the loan.
Debt Consolidation Through Borrowing From Family And Friends
For some people, the ideal route to debt consolidation is family and friends. If there is friends or family that are able to loan to you to allow you to get your debts caught up, this could be the most effective route available. The terms tend to be the most flexible plus the interest (if any) is usually low.
- Many people do not want to ask family and friends for the money due to limitations and strains it may place on the relationship.
- You may possibly not have family and friends that can loan you this amount of money.
- You can be confronted with questions regarding what you spent the cash on, along with the emotional issues with that.
- If you are unable to pay back your debt, you could be causing your family or friends to lose money.
When borrowing that way, look at the problem this can have on your personal relationship. If you have a family member who might be happy to loan it to you, have a written agreement drawn up to ensure that you and also the lender possess a formal agreement to adhere to.
Debt Consolidation Through A Debt Agreement
For many, a debt agreement is the approach to use to consolidate debt. In a nutshell, it is a legally binding agreement among loan providers and the debtor. This method can assist you to avoid bankruptcy, when you are insolvent. In this method, an agreement is drawn up and presented to your creditors by a professional organization. The proposal may offer options for example periodic repayments, lump sum repayments of lower than what is owed, a moratorium on payments and even a payment through the proceeds of a sale. All creditors vote on the proposal and, if accepted, all creditors will need to adhere to the terms of the agreement.
- The only restriction applies to people who are not insolvent. If you are not, you will not qualify for a debt agreement for debt consolidation, in many instances.
- All lenders must adhere to the terms of the agreement, even when they did not vote for the proposal.
- There is no further, accruing interest and the creditors cannot carry on any action against the debtor.
In this means of debt consolidation, the borrower is much more in command of the solution rather than left to deal with the costs enforced by the loan providers. In most scenarios, the agreement proves to be beneficial to the borrower’s specific needs at the time, including restrictions on income. Put simply, this method can be customized to fulfill your specific needs, which are often to cease payments for a short time or even to put in place a different repayment schedule.
For many people, debt consolidation is the option to take. The issue is which of the above options is the best one to take into consideration? For people who do not qualify for new loans, a more suitable method to take can be a debt agreement, particularly if you are insolvent and not able to change your debt repayment options any other way.
Fox Symes is the largest provider of debt solutions to individuals and businesses in Australia was established in February 2000. Fox Symes helps over 100,000 Australians each year to resolve their debt and take financial control.