If you have a large amount of credit card debt, especially if those debts carry high-interest rates, you may want to consider consolidating your debt. This can be done with either a personal loan or by obtaining a zero percent interest rate credit card.
Why Consolidate Debts
There are a number of reasons why you would want to consolidate what you owe, including easier payment plans, the potential to lower your total monthly payment amount and the ability to reduce your interest rates. Additionally, if you have credit cards that charge fees for having them open, consolidating your debts will get rid of these additional costs.
Many people find it easier to make a single payment to a creditor each month instead of having to remember to make several payments. If you tend to forget to make payments, a single monthly payment could help you avoid late fees. Additionally, many credit cards increase the interest rates that they charge the longer you have the card, so a new loan could give you a much lower interest rate, which can dramatically reduce what you have to pay to get out of debt.
Personal Loan Consolidation
One popular method of debt consolidation is to take out a personal loan. A personal loan can normally be obtained through a bank or a credit union, and they allow you to pay back what you owe over a period of time. Personal loans can be secured or unsecured, although most people prefer to obtain debt consolidation loans that don’t require them to put down collateral. If you’re having trouble making ends meet, the last thing you want to do is to worry about your home being repossessed if you can’t keep up with a personal loan.
When looking for a personal loan, you’ll want to consider the repayment duration, the interest rate you’ll receive and if there is an origination fee. Unsecured loans tend to have higher interest rates than secured loans, and this is especially true if you have less than stellar or bad credit. It’s important that between your interest rate and your origination fee that you don’t end up having to pay more to get out of debt in the long run.
Your repayment duration should also factor in your decision to take a personal loan from a particular lender. How long you have to pay back a loan will determine your monthly payments, and you need to be sure that you can make them without financial strain.
Credit Card Consolidation
Another option for unsecured debt consolidation is to look for a credit card that has a low or zero percent introductory interest rate. Depending on the credit line offered, you may be able to transfer most or all of what you owe onto the new credit card. This will give you the ability to still make one monthly payment, and you’ll also benefit from a reduced interest rate.
However, if you are considering this option, make sure that you select a card that allows for free balance transfers and doesn’t have an expensive yearly fee. If a card has a costly fee, you may be losing out on the savings you’re getting from a reduced interest rate.
If you opt to use a credit card to consolidate your debt, you’ll also want to ensure that your interest rate after your introductory offer expires isn’t higher than the interest rate you had before. If you can’t pay off your credit card before the regular interest rate kicks in, you may end up in a worse position if the card’s interest rate increases significantly.
Unsecured Debt Consolidation
The problem with debt consolidation is that it will entail opening up a new line of credit, in order to close all the other open debts. Considering the way loans are arranged with the use of credit ratings, this can be a long and painful experience. If you already have a low credit rating, you might not be able to find an unsecured loan, a loan that does not require collateral. This might be a less painful outcome than finding a lender who would be willing to give you the loan but at an interest rate bordering on usury.
Acquiring a personal loan usually entails having some sort of collateral. If you have a substantial savings account, you can use that as a form of collateral with the lending bank, specially if the account is with them. Otherwise, you would have to find another kind of collateral, or a different lender. Again, it goes back to your relationship with the lender or the bank. If you have a good relationship with them, have kept a bank account with them for a long time, a high credit score and you have a good loan repayment history, that can help sway them to give you a loan. Its definitely more challenging to get a debt consolidation loan bad credit option.
In terms of an unsecured loans, credit cards are a better choice. That is not to say that you do not require a collateral. On the other hand, the mechanics of credit card balance transfers is different from a regular loan. In practice, a loan requires a collateral. In contrast, a debt consolidation involving credit card balances does not require a collateral. There is a different procedure in place.
Bank to Bank Transactions
A credit card debt consolidation entails the transfer of debt from one or more credit card companies to another. At the same time, the new lending credit card company opens a new account for you, the old accounts are not closed automatically, and you should talk to a qualified financial expert to find out if closing them is in your best interest.
The new lender “buys” out your debt, and pays the old lending banks your remaining balance. What is not invisible to you is the actual transaction and negotiation which goes into the transfer between credit card companies. The card transfer consolidation means that you won’t accrue any more interest or fees on your previous accounts. As a result, consumers can save a great deal of money. Moreover, since more of your payments on your new balance transfer card are going to your balance instead of fees or accumulated interest, you’ll be able to pay off your debts faster.
The new lending bank now holds your debt. It also gives you a new credit card. In exchange, you get a lower interest rate to pay for the balance. This is usually part of the offer when bank or credit card agents give you a call offering a credit card balance transfer. Along with the offer, you are also given an option on the paying period, as well as other terms. If there is a zero-interest rate option. This is usually for the repayment within a limited time frame. Higher interest rates and other penalties ensue if you are not able to follow the payment schedule.
Along with the consolidated credit card balance, you are also given a new payment schedule. In most instances, this is an interest free period with stipulations. You have to follow the conditions, which include prompt monthly payments.
Benefits to a Credit Card Consolidation
There are some benefits to having a balance transfer type of credit card debt consolidation. First off, you can still use your credit card, however, you have to pay any amount you purchased within the month’s cut off, along with the stipulated monthly repayment. Another benefit is that, because this is a new repayment scheme, you have less or no interest, and no penalties to pay. This situation can change quite quickly if you lapse in your payments.
If you have a large amount to repay with a zero-interest rate, it is in your best interests to keep paying on schedule. In essence your debt is frozen, and you have the opportunity to whittle it down to size during the repayment period.
You now have only one debt to repay. You also only have one lender to worry about. You can add new debt to the credit card, but you have to repay the new purchases within the cutoff, so that it will not add to the balance that you need to pay.
New Credit Card Responsibilities
You will also have to check with your new credit card company regarding the new credit limit. In theory, your new credit limit is the amount of the consolidated debt. This might be larger than any credit limit that you might have for any card prior to balance transfer.
If you were a person who religiously paid their credit card debts, leaving no balance remaining after every month’s statement, then your new credit card limit should be higher. You have demonstrated the capacity to be a good payor, and the higher limit is your reward. However, if you have been having a hard time keeping to your monthly payment schedules, then a higher credit limit might not be good for you, especially true if you like to go on a binge shopping spree.
The larger credit limit is a responsibility and you need to ensure that you do not max out your card, or if you do max out your card, that you are able to pay amount due, as well as the amount required as per your debt repayment schedule. There is always the possibility of slipping up and skipping a monthly payment, which can lead to stiff penalties.
If, instead of paying for the maximum amount, you pay for the “minimum payment” for a cycle, you would easily see that even without any penalties, the balance due would grow substantially. When you defer payments, the chances of you paying off your debt slips away because of the prohibitive interest rates and penalties. You should also note that the interests are compounded monthly. Meaning that any interest added to the balance, earns interests during the succeeding cycles. This makes the repayment even stiffer and harder to control. Skipping a payment can lead to uncontrolled and unmanageable credit card debt, which was what lead you to debt consolidation in the first place.
Other Loan Facilities
Much like having a large credit card loan, it is still okay to have large debt as long as you are in a position to repay it. However, if you are no longer keeping up with monthly payments, the compounded nature of the interest payment will keep you from repaying the loan. If you have poor credit, it would be hard to get a loan with a lower interest.
Prime interest is an interest rate given by banks to their preferred clients. These clients may be rich individuals who do a lot of business with a given bank. However, these are usually companies which have been working with the bank for a long time, and have a history of being good borrowers. If you are not one of the above, then you would most likely get a loan at an interest rate which is higher than prime. What you need is a low-interest loan, and you might not even qualify for a prime loan.
If you cannot get a lower interest rate, then you should aim to restructure your debt payment with a loan which offers a smaller monthly payment but with longer payment period. This would result in two things: first, that you would be paying more interest in the long run; and second, you would have a more affordable monthly payment, which makes it more possible for you to repay the loan or debt. If you're a veteran you may find a better interest rate on VA loans for debt consolidation.
Getting a subprime loan might be hard to do. You would need to put your efforts at repaying your debt. In addition, it might take a long time to repay the remaining balance. However, this is still more preferable to defaulting on the loan, having a very low credit score, and the resulting inability to apply for a loan. Going into default might lead to filing bankruptcy. Which can lead to other problems down the road.
Financial Advisor, MoneyBeagle
Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems.
Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.
Get out of Debt Today