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The Debt Consolidation Truth

approved-loanMoney troubles spare no one. While some people are resourceful about handling their money troubles, most people aren’t. Sometimes, however, you can be caught completely unaware. It is in this kind of situation that you need sensible advice, and even better, a viable solution that is not shady and won’t plunge you into a rabbit hole of debt.

What do you do when you are seriously in debt? Do you file for bankruptcy? You can if you are running a big business and need a financial institution to step in and resolve your problems. But for the every man, there is one solution, debt consolidation. Read on to learn more about how you can consolidate your student loans to make it easier for you.

What is Debt Consolidation?

Debt Consolidation is nothing but paying off your old debts with the help of a new loan or line of credit. Your previous loans, credit debts, etc, are paid off with this new credit that comes as a loan, or even a credit card with a low rate of interest.

How is this better?

All your debts are consolidated into a single debt amount. Now, you have to pay off only a single loan as opposed to multiple loans that you took from various sources. This new debt not only brings down the amount of your overall debt (since interest is lower) it also makes your repayment simple. A single debt means one person to pay off and a single amount to bring down.

How to Consolidate?

  1. Debt consolidation and debt management are not one and the same.
  2. There are firms that offer debt management or debt settlement services, but this is not debt consolidation.
  3. You can avail the services of a firm or a financial agent to help you get all your statements together in order to consolidate your debts.
  4. You can also consolidate your debts with the help of a balance transfer credit card or an unsecured instalment loan.

Does this really work?

Yes, it works. For those who know that their debt amounts are huge and that they need to change their money habits, debt consolidation is a good bet. While it doesn’t magically make your debt disappear, it just helps to consolidate your multiple debts into one and pay it off a little later and at a lower rate of interest.

Debt Consolidation options

When stuck in a financial crisis, you can choose one of these four options to consolidate your debts. The first two options are consolidation loans that you can opt for yourself and will help you consolidate all your debts into one. However, the last two options – the programmes involve a third party and their fees will be added to your already existing debt.

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  1. Unsecured Debt Consolidation Loan

This is a type of debt consolidation loan that requires you to take a personal loan to pay off all your unsecured debts. If you have a good credit score, you can opt for an unsecured debt consolidation loan. If your loan provider is satisfied with your credit score, you will be given a personal loan at a low interest rate. You will have to make a single monthly payment towards this loan.

  1. Home Equity Loan

This is similar to an unsecured debt consolidation loan but requires you to sign up your house as a security for the loan. Though the credit score required for this option is not very high, it is a risky option as your house can be taken away if you default on your payments.

  1. Debt Settlement Programme

This programme will require you to stop all payments you are making towards your creditors and close all your accounts. Then, you will have to make monthly payments towards a trust fund. This fund when built up, will be used by your debt settlement company to negotiate with your creditors. They usually negotiate to reduce the debt amount by agreeing to pay the amount in full. Your credit scores will be greatly affected due to the accounts closure.

  1. Debt Management Programme

In this programme, the debt consolidation company will take one monthly payment from you. This amount is then split and paid off towards all your outstanding debts. The payment process is simplified and taken out of your hands. This programme does not require you to have a good credit score.

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The Truth Behind Debt Consolidation

Now that you are planning to consolidate all your debts, you need to know the whole truth about debt consolidation (download the PDF).

  1. Debt consolidation is something you can do without any assistance from anyone else. Whereas, debt management or debt settlements are programmes that involve a third party who will help you repay your debts.
  2. Filing bankruptcy is a legal proceeding.
  3. When you consolidate your debts, you still have to repay the new loans and bills. It is not like filing for bankruptcy where you will be relieved of all your debts.
  4. Debt consolidation only postpones your debt repayment. It does not reduce or remove your debts. However, if you do find a good repayment option, you can reduce the interest payable on your debts.
  5. Debt consolidation does not reduce your credit score. On the contrary, it may help you improve your credit score as all your small debts are repaid in full and well in time via your new loan.
  6. It does not publicize your financial status unlike when you file for bankruptcy. You can consolidate all your debts at your own discretion.
  7. When you pay to consolidate your debts, you are paying off all your small debts and the paying off a single amount instead. This only structures the repayment process and easier since you don’t have to keep track of who to pay how much and so on.

Impact Of Debt Consolidation

When you consolidate your debts, it makes it a little difficult for you to get loans in the future. When you apply for a new loan, the financier will conduct a background check on you, which will reveal your previous debts and repayments.

Not every financier is okay with lending money to those who use the service of their competitors’ to pay them off. Though you are repaying them, you are contributing towards the growth of their competitor. This may deter your financier’s word-of-mouth publicity (when you tell your friends the other company offers better interest rates).

What You Should Watch Out For

  • When you are consolidating multiple loans with different rates of interest, your consolidated loan interest will fall somewhere in between your existing interest rates.
  • Always calculate the total amount payable at the end of the term, along with interests, for both your existing loans and your new consolidated loan. Compare to see which requires you to pay higher.
  • Your new consolidated loan’s interest rate could always be lower than few of your existing loans’ high interest rates.
  • It may also be higher than some of your loans’ low interest rates.
  • If that’s the case, it is always better to consolidate only those debts with high rates of interest and continue with the existing plan for the low interest rate loans.
  • Though it might be a lot of numbers to crunch, never forget that your overall debt repayment will be lower.

Calculate And Choose

When you are consolidating more than one student loan, with the help of a third party, they may try to convince you to accept a consolidated loan offer with a low interest rate. It may be lower than one student loan, but might be higher than the other student loan. Calculate the total repayment period and amount for each loan individually and then decide the best option for you. Do not be blinded by the low rate of interest. Sometimes, a lower rate of interest for a longer period will work out to be more expensive than a high rate of interest for just a few months.

Student Loan Consolidation

Recent college graduates in the United States are opting out of repaying student loans en masse. It is a bit of a drastic measure, but it has an impact on how financial institutions will perceive you in the future. However, if you want to pay back your student loan, then student loan refinancing is an excellent option.

If you want to consolidate student loans, you need to look into how long is your loan repayment period and the interest rate. Longer the period, higher is your overall interest paid. You must calculate how much you will be paying monthly and what is the total amount you would have paid at the end of the loan period. If it is more than what you are paying now, it is not really a great option.

If time is what you need and don’t mind paying a little extra, you can opt for this consolidation. It is always better to compare a few options and pick the one with the lowest interest rate.

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Federal Student Loan Consolidation

If you are planning to consolidate your federal student loan, you don’t have to pay any fees for it. You can consolidate multiple federal student loans into one direct consolidation loan, cost free. Some federal student loans like Stafford and PLUS loans are known to charge a little in terms of fees but this fees is deducted from the disbursement cheque. You will never be required to pay any fees upfront unless it is a scam.

Private Student Loan Consolidation

A private student loan usually has higher interest rates than a federal student loan. Hence, these two loans cannot be consolidated together. However, you can always refinance your private education loan. This is nothing but replacing one loan with another.

Private student loans are usually offered based on your credit score. Once you graduate and have a well-paying job, you can look for refinancing options. If you have not faltered on any payment that may affect your credit score, you will have lenders ready to refinance your private education loan. You can even look for a new loan at lower interest rate if you have improved your credit rating over the years.

Wells Fargo Student Loan Consolidation

With this type of a consolidation loan, you can combine multiple private student loans into a single loan. You can opt for a single payment or refinance all your private student loans with one single loan. This may reduce your monthly interest payment or extend the period over which you have to repay the loan.

You can choose either a fixed or a variable interest rate and will have quite a few competitive options for your benefit. Also, if you have an existing Wells Fargo Student Loan, you will be entitled to a discount on the interest rate for your new consolidated loan.

responsibilityPayday Loan Consolidation

Payday loans are great rescue options when you are caught in a financial crisis, unexpectedly. However, if you don’t pay them back within the first few instalments, your debts could mount up along with high interest rates. In such a situation, you can consider consolidating your loans.

However, only a few payday lenders allow you to consolidate such loans. The ideal option is to seek the help of a credit counsellor who will be able to tell you if your payday lenders will allow you to consolidate your loans or not. The counsellor can provide you with feasible solutions if your payday lender does not allow you to consolidate the loans.

Credit Card Consolidation Loan

Just like in payday loans, if you don’t repay your credit card debts in time, you will be stuck with a large amount of debt at very high rates of interests. When you get a cash advance on your credit card, they are given to you on high rates of interest. In order to consolidate these credits, look for a credit card with low interest rate and transfer your existing high interest debts to this card. If you have a good credit score, you will have a few options in this line.

Conclusion

No matter how great an offer you get on your consolidation loan, you will still be in debt until you pay it off. You can always opt for another consolidation loan and pay off the existing loan. This will only give you more time to repay your debts, but will never get you out of debt.

When you have a good credit score, consolidating your multiple debts into one will be easier as there will be more lenders ready to help you out. Everything depends upon your financial behaviour. When you plan your finances well, not does it reflect well on your credit score, it will also reduce your stress.

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