Like many Americans, you may feel swamped by bills every month. Struggling to get by, paycheck to paycheck, you find yourself falling further and further behind on your payments. You consider filing for bankruptcy but decide against it because you don’t want to ruin your credit. You think there has to be a better way to pay down your debt. Thankfully, there is a better way to pay down your debt and it’s called a debt consolidation loan.
A realist at heart, you wonder what the benefits of a debt consolidation loan are and what you should know before getting one. A debt consolidation loan helps consumers to effectively manage and reduce their debt over time. A debt consolidation loan allows you to have more discretionary spending money as you continue to pay your loans by offering you a lower monthly payment than your current bill payments. While a debt consolidation loan won’t instantaneously improve your credit score, it will provide you with the simplicity of one bill to track as you pay down your debt.
It’s important to keep in mind that a debt consolidation loan doesn’t eliminate your debt. As its name implies, all your bills simply transfer to a new lender. So if you have $10,512 debt, this is the balance that would transfer to your debt consolidation loan. However, depending on your credit history, you may be able to negotiate a longer repayment period which may lower your monthly payment. While a longer repayment period will increase the total amount your repay, you can always pay off your debt consolidation loan faster by making more than the minimum monthly payment.
It’s also good to know what types of bills you can consolidate. In addition to rolling high-interest credit card debt, you can also consolidate your student loans. Homeowners can leverage their available home equity to consolidate any kind of debt whether it’s in the form of a cash-out refinance of their current mortgage or a new home equity loan or line of credit. With a cash-out refinance, home equity loan or line of credit, homeowners are able to take advantage of lower interest rates than other forms of credit, freeing up their cash to pay more of their principal balance. Also, such loans are tax-smart because homeowners can deduct up to 100% of the interest.
If your debt outweighs your income and you’ve gone from using one credit card to using three or more, it’s time to get your debt under control. First, consider where you stand financially by looking over your credit card debt, car payments, mortgage and student loans so you have a solid understanding of what debt obligations have become the hardest to manage. Next, revise your household’s budget, figuring out a way to cut back on what you’re spending. Third, make a plan for how to pay down your debt. One way is to reach out to your creditors and ask to make partial payments or work out payment plans you can afford. Another strategy is to pay off the balances on the highest-interest debt first like those high-interest credit cards while continuing to pay the minimum on your other accounts especially on the most important bill of all, your mortgage. With interest rates at historic lows, it just makes sense to investigate refinancing your mortgage for either a lower interest rate or to increase the amount of time you take to repay your loan. Limiting credit card use is an essential part of controlling your finances. It’s best to use cash as often as possible. Finally, see a loan officer or credit counselor to help you explore additional options that can help you get out of debt.