Debt Consolidation: A Panacea Or A Costly Credit Card Debt Alternative?
Many people feel discouraged once they find themselves in credit card debt that they are no longer able to manage. Overwhelming credit card debt may be effectively managed with a variety of traditional and non-traditional debt consolidation options.
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.
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ABOUT THE AUTHOR
Melissa Kellett has a Master in Finance and has been a financial consultant for years. She specializes in Poor Credit Personal Loans people and also in helping people to get approved for Personal Loans, unsecured loans, Bad Credit Loans Guaranteed Approval, no credit check loans, student loans among many other financial products. Visit her site at http://www.speedybadcreditloans.com