Wednesday, 16 January 2019

Most People Will Never Be Great At Debt Consolidation. Read Why

Most People Will Never Be Great At Debt Consolidation. Read Why

Typically debt consolidation for most of us, it's understood to be a loan. Often times, people might consider using a balance transfer as a form of debt consolidation as well. What types of loans? loans you might get from your bank, a personal loan, or a peer to peer loan, or even a home equity line of credit. Those are coming back. After the recession, we didn't see as many of those, but they're more common.


When you're taking out a loan, you're typically going to be paying off multiple accounts. So let's get into the PROS and CONS of that type of debt consolidation

First off, the main purpose of consolidating your debt is to lower your interest rates. So let's assume, for a moment, you have five credit cards and the average interest rate is 17% and you can get a home equity loan and pay 6%.

  • The benefit here is obvious. In the case of, say a balance transfer, some of those interest rates could be fantastic, you can get into rates that are 0% or relatively lower than 5%.

And if the balance that you have available to use and transfer other debts onto that is large enough, you might be able to whack out all of your other unsecured debt.

Moving on to other PROS is a simplification, and it's because you only have one payment now. If you're consolidating five credit card into one loan, just paying them all off and now you just have the one loan and only one payment to make.

It's less to keep track of it's fewer things to worry about, ACH payment from your bank account or keep track of things, in other words, the simplicity is a benefit.

Another PROS and it will depend on who you are and how stretched your refinances are, but the preservation of your credit, of your credit score, or having nothing happen to any of the tradelines on your credit is a huge benefit to consolidation, and let me explain.

When you do alternatives to debt consolidation to manage, if you're in a tight spot and you absolutely are doing this to get lower interest rates, otherwise how are you going to afford your bills.

The alternatives like bankruptcy that hurt your credit, debt settlement, obviously hurt your credit, even debt consolidation through, it's a different type of debt consolidation, through a credit counseling agency and non-profit, they actually close your accounts. In that regard, it doesn't really your score or credit counseling, per se, but it's on your report that you're on a managed plan, and it can prevent other options, other financing options, at least for a little while when you're on one of these plans.

A debt consolidation loan is probably the best way to manage that debt situation and get a better interest rate and have it preserved your credit. 

Another benefit is a fixed payoff, assume for a moment that you're doing this correctly and you are taking those five credit cards for example and you are combining them into one payment. And now, that fixed loan is not something that revolves, where you can use the credit card a month to pay some and then use it some more the next month and then pay it off and the balance fluctuates and the minimum payment fluctuates.

In a traditional consolidation loan, it's going to be a fixed payment and that gives you a fixed time to pay it off. So there's a lot of benefits in that, in predictability and so forth.

  • A balance transfer, I mentioned briefly and I want to mention them even more now as a PROS. There's a lot more flexibility in balance transfer because banks do compete for your business.

Once you've done a couple of these consolidation types of the event through balance transfer though, it starts to look like you're playing musical chairs. I'll get to more of that in the CON. Very specific to balance transfers. But at least in this context where you have more options, banks competing for your business, those balance transfers could be seen as a PRO, depending on who you are.

ON THE CON SIDE

One of the biggest problems and it depend on who you are, but for me, from my perspective of communicating with consumers on problem debt. I just see this so much as it's, for me, the first thing I want to point out a person if you can avoid it. You might already be when you are reading this article.

You do the balance transfer or the consolidation loan and you don't close those other accounts and I get, but you start using those other cards. They were paid down to zero and suddenly now you've got those racked up, those charges, and the minimum payments that are now again stretching your budget tin. And you don't have that flexibility anymore in your budget, because you have one consolidation loan that you're paying the minimum payment on every month and now you've got the credit card bills on top of it, so it's compounded.

Your earlier efforts to consolidate your bills, needing to do it again and not have a lot of options, be very careful about that CON. Let me get to that right now.

  • A balance transfer is usually at an intro rate, it's like you get this consolidation balance transfer loan type of product, and it stays at that low, you transfer all your balance over there, and everything's affordable because it was an intro rate. It was 0%, 4%, 2.9% and then in the 13th month, it goes up to 11% or 9.8% or something like that.

And suddenly now that's not within your budget. I've seen it happened even worse higher interest rate that they revert to. Or you missed a payment accidentally and now the intro rate is gone, these balance transfer changes or these intro rates are only temporary.

  • The person who has a consistent income, very fixed and is able to do and afford their bills, doing a balance transfer and then at their Christmas bonus that they know they get every year or they get their tax refund and they pay that stuff down. Fine, but if your income is not consistent if your spending is not consistent if you have unexpected expenses come up and you start using those cards again, 

Those balance transfer are usually a stop-gap type of measure at a critical point where you change your behavior as well. So these debt consolidation things are a great tool along with some tighter budgeting, often enough, and/or some behavior changes and some spending, changes, be careful of the balance transfer boogie.

Another CON for consolidation loans and balance transfers and is you have to apply for these things, these other accounts. And you have to get approved. 

  • If you're already stretched to a place where your interest rates aren't affordable, it could very well mean that your debt to income ratio, your credit utilization on some of your accounts that you're trying to consolidate are so high that you won't qualify.

That's an impediment to being able to consolidate in the first place, so be careful.



Okay, that is my simple list for consolidation loans and balance transfers. hopefully, you learn something from this article

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