Consolidating your debts makes it easier for you to fall through with the repayment process as it involves making a single payment as opposed to dividing the payments among multiple credit accounts. It is easier to make the payment for one single bill rather than to compile and organize half a dozen of them. Consolidating your debts may give you the leeway that you require in order to get your finances back under control and help you to pay off your debts asked with a lesser monthly financial burden. There are different ways in which you can consolidate your debts.
Credit Card Balance Transfer
A credit card balance transfer is done by transferring the balance on various credit cards onto a single low interest rate credit card. This not only makes the payment of all the credit card bills easier by combining them into a single account but also reduces the overall rate of interest. Many are times the low rate of interest on a particular credit card is a promotional offer. Before transferring the balances on to a card with a low rate of interest you should be perfectly aware of whether the lower rate of interest is in fact a temporary offer and when is it going to lapse. The main idea behind any kind of debt consolidation is to reduce your financial burden. There is no point in going through with the whole process if it is not going to help you save money.
Home Equity Loan or Home-Equity Line of Credit
A loan against home-equity or home-equity line of credit usually has a lower rate of interest and a higher borrowing limits than any other kind of loan. This is simply because the asset being offered as collateral, namely your home, is usually the highest value said that a normal consumer has to offer as security. The difference between a home equity loan and a home equity line of credit is that a home equity loan is a close ended account where you borrow the money once as a loan and than expected repay it according to the terms and conditions decided upon. A home equity line of credit is an open ended account where you can keep borrowing up till the credit limit as and when you need it, just like a credit card.
Both these kind of loans must be thought about very carefully before being used to consolidate your unsecured debt. If you fall behind on your payments you face home for closure which is a much worse situation than defaulting on your credit card payments.
Debt Consolidation Loans
Debt consolidation loans are specialized loans offered for the specific purpose of consolidating debts. these kinds of loans are offered by banks and credit unions. there are also the so called non profit debt consolidation companies that offer debt consolidation services. you must watch out for the debt consolidation companies that make unrealistic claims, have dubious credentials, have a lot complaints against them in the records of the Better Business Bureau and the local offices of your state’s attorney general. these companies can often charge you high fees either upfront or in more subversive ways making the overall cost of your debt much higher.
The best sources to deal with for debt consolidation loan is through your own bank or any other reputed bank with an accredited debt consolidation solution. there are also some credit unions that may help you to with taking out a debt consolidation loan.
Borrowing against a Life Insurance Policy
Not many options of taking out a debt consolidation loan unadvisable or desirable. This you are mostly required to put a valued asset online as a collateral. While life-insurance policy is not exactly an asset is a valued financial security for your family. Borrowing against the life-insurance policy means that you borrowing against the future security of your family. As is the case with borrowing against an asset you should borrow against the life-insurance policy only with the intention of paying back the money that you take. You can usually borrow up to the cash value of your life insurance policy. Although your insurance company will probably not require to pay back the money as long as the amount borrowed is less or equal to the cash value it is a good idea to make the payments anyway. If you don’t the death benefit will be used to cover what you borrowed and your survivors may not get any benefit at all.
Borrowing from Retirement
This is another last ditch methods that you can resort to to consolidate a debt. Most retirement plans allow you to borrow against them under certain terms and conditions. In most cases you are required to repay the money that you borrow from retirement fund within five years or you are liable to be subjected to penalty and an income tax as it will be considered an early withdrawal. The same loan will be due to it paid off within 60 days if you happen to leave the job which if failing to do so will make you liable to face early withdrawal penalties. As with borrowing against a home equity or a life insurance policy think hard before borrowing money from a retirement fund. It may present itself as the simplest option but must only be used if you are certain to be able to pay off the money you borrow.
Disadvantages of Consolidating Debt
The foremost disadvantage of consolidating a debt comes about when you take out a debt consolidation loan or borrow money against a valued asset such as a home or critical funds such as the life-insurance policy or a retirement plan. None of these are very desirable options as you are probably using loan secured by your assets to pay off an unsecured loan. Risking the foreclosure on a home or the financial future of your family is worse than not being able to make the payment on your credit card. The foremost thing that you should determine before trying to consolidate a debt is to pay off whatever money you borrow for a debt consolidation loans.
Having a reduced monthly burden after consolidating your debt should not make you feel as if the debt has gone away. It has merely shifted from one place to the other. Though you may feel the pressure greatly reduced owing to having to make a lower single payment every month, paying off the debt consolidation loan should be made a priority. Extreme care should be taken to handle credit extremely carefully and to avoid incurring further debt till the time you have completed your debt consolidation.