Debt consolidation means getting a new loan to pay off all your debts through a single payment plan. With the help of debt consolidation, you can also pay off multiple unsecured loans from credit cards, medical bills, personal loans, payday loans, etc. A Debt Consolidation Loan can be an effective way to manage your finances in 2020. You can roll multiple debts into a single payment, ideally with a lower interest rate. It is like refinancing your mortgage – you take a big loan and then pay off all your previous unsecured loans.
Why is debt consolidation important? Well, living with debt has ultimately become the American-way of life. Unfortunately, what many people do not understand is that living with debt normally comes with a rather hefty price tag. Individuals who owe more than what they can pay for are not only less healthy but also more stressed out and live an oppressed life. Many people face a financial crisis at some point in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or a pandemic like COVID-19, it can seem overwhelming.
The coronavirus crisis and the tens of millions left unemployed due to the government-mandated shutdown has thrown many into a financial crisis. Unemployment and bailout checks may not pay the bills, and many went deeper into debt covering their living expenses in the interim. Furthermore, this does nothing to reduce the debt they already owed. And the bills keep coming in. But often, it can be overcome. Debt consolidation is one possible solution to this problem. If done in the right manner, your financial situation doesn’t have to go from bad to worse.
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Difference Between Debt Consolidation and Debt Settlement
A debt settlement involves the settlement of debt, typically for less than is officially owed. If you’re already far behind on your bills, you could scrape together some cash and offer it to creditors to settle the debt. While this hurts your credit, the damage has already been done by the late payments and missed payments. On the other hand, debt consolidation hardly affects your credit score, since the old debts are paid off by the new loan(s).
Debt settlement companies have a history of scamming people. They promise to take over your finances and eliminate debt collection efforts. They may take several thousand dollars while doing nothing to settle the debt. Instead, they wait a few months for creditors to become desperate and then offer them pennies on the dollar. You can do that, too, and without paying their administrative fees. In a worst-case scenario, the “debt settlement” company takes your money and does nothing or steals your identity.
Do-it-yourself debt settlement comes with risk. Too many borrowers think they’ve negotiated a settlement when the creditor simply accepts the money as a payment. Because they don’t get the right paperwork done to settle the debt as paid in full, they are pursued the difference. Collections may ramp up because they did pay something. All the while, your loan balance is increasing due to interest and late fees.
You may end up owing far more than you otherwise would have because the creditor does not have to accept a debt settlement. Debt settlements are most likely to work if the account is so delinquent they are afraid you will never pay it. Know that making a payment does reset the clock on the statute of limitations, so don’t offer settlements on debts so old they’re about to become noncollectable.
9 Best Ways To Consolidate Your Debts In 2020
You can do consolidate your debt on your own, or you can work with an agency to help you through this process. If you are living deep in debt and looking for viable ways to consolidate your debts, then the following 9 ways to consolidate your debts will assist you in gaining your financial freedom, together with several other benefits.
1. Set Time-Sensitive Goals
Although you may be facing an insurmountable amount of debt, chipping out small amounts of money consistently, will go a long way in ensuring that the debt weighs down eventually. Begin by first setting realistic figures and the respective dates that you hope to achieve these goals. This will ensure that you come up with workable goals, which are within your reach. This is one of the best ways to consolidate your debts.
2. Take Out a New Mortgage
A simple way to consolidate your debt is to take leverage of your home’s equity and use it to pay off debt. A cash-out refinance allows you to you cash out your home’s equity and use it to pay off debt. This amount is consolidated into the new, larger mortgage balance. This has several benefits. One is the lowest possible interest rate since it is secured by a valuable asset. Another is that you have control over which debts you pay and when.
Note that this does put your home at risk if you can’t pay the larger payment.
Also, it could be more expensive than an aggressive debt repayment plan since you’re financing the purchase of consumer goods and services over 15 or 30 years. You are also taking the risk that you get complacent about your over-spending and run up new debt. And you won’t have any good options left in the future.
One issue with this approach is that it isn’t an option if you don’t have the equity to take advantage of it. You’ll often need at least 20 percent equity in your home, and this includes the existing mortgage balance.
Another issue is the fees involved. Expect to pay several hundred dollars at least to consolidate your debt this way. It may be worth it, such as when you refinance a hard money loan into a new mortgage while converting a fix-and-flip property into a rental. In these cases, the increased value of the home once repaired gives you the equity you need to pay off the associated debts.
If your primary lender won’t allow you to refinance your mortgage to pay off debt, a second mortgage is an option if you have enough equity. The downside is the much higher interest rate they’ll charge. Yet it beats debt settlement because debt consolidation like this doesn’t hurt your credit.
If you choose to go this route, follow these steps.
- Create a realistic budget to verify that you can manage the higher monthly house payment.
- Furthermore, you need to get control of your spending and stop going into debt, because you probably can’t tap into the home equity again or pay the closing costs a second time.
- Avoid borrowing against your home to pay off business debts or pay for living expenses run up because you didn’t pull a salary from your business.
- You’re personally liable for the debt against your home, even if you declare business bankruptcy later.
3. Take Advantage of a HELOC
A home equity line of credit or HELOC may be a better choice for consolidating your debt if you have sufficient equity. This approach is again limited by how much equity you have in the home. One advantage of the HELOC is flexibility. As a line of credit secured by your home, you can use that loan to pay off smaller debts. Once you’ve paid off all the old ones, you’ve now consolidated these debts into a single HELOC payment. You control when you pay off the smaller loans. You retain the ability to negotiate debt settlements.
The HELOC typically has a low-interest rate similar to a refinanced first mortgage or competitive second mortgage. However, the interest rate on a HELOC may rival that of a credit card, if you have bad credit. Another factor to consider is that the HELOC is secured by your home. Miss this payment, and the lender could foreclose on your home. Interest rates on a HELOC may change, too, based on your credit rating. This means the interest rate you pay on your consolidated debt may rise, especially if you miss a payment.
4. Consolidate Multiple Debts Through a New Unsecured Loan
You may be able to take out a new, unsecured loan to consolidate your debt. Credit unions are more likely to extend such a loan than big banks. You’ll pay a higher interest rate than a mortgage unless you offer property as collateral. One benefit of this approach is that you can shop around for the best deal. You can choose when you take out the loan. There are no closing costs like a mortgage.
In case your credit standing is still in good shape, then you could apply for a personal loan, which you could use to consolidate your debt. Though personal loans do not have the most attractive interest rates, their terms are normally flexible and the amount of money that one can receive may go a long way in consolidating the debt to a more manageable amount. Just realize your personal relationships will now be affected by your debt.
A better option is using crowdsourcing to raise money to consolidate your debt. You will get a lower interest rate than credit cards. You can use the crowdfunding site to create a formal payment system with friends and family without having to manage multiple personal loans. And you can tap into a much larger network of lenders than the Bank of Mom and Dad.
One downside is that you may have too much debt to be eligible for a new, large unsecured loan. If your credit is already shot, this isn’t an option, either. If you do qualify for the debt consolidation loan, you must still get control of your spending to avoid going deeper into debt.
5. Transfer the Debt to a Low-Interest Credit Card
Credit card consolidation is a great way to get out of a bad credit situation. Many Americans own lots of credit cards, and would normally reach out to the ones which are more accessible in their wallets. Nonetheless, according to financial advisers, this is not a great way to keep tabs on your debts because different credit cards have different rates. If you're struggling with significant credit card debt, look for a card with a low-interest rate.
You can use it to place a bigger fraction of your debt and then commence to clear the debt at a much lower rate than the one you were playing with. This is the most effective way to consolidate your credit card debts. To lessen the burden, and pay off debt faster, many consumers consolidate all balances onto a single credit card. When you consolidate the cards your consolidating will have much lower credit utilization ratios, but your overall ratio will remain the same.
We do not recommend using credit cards to consolidate your debt. It is dangerous to consolidate various loans into a single credit card loan, because of the high-interest rate. Do not try to chase teaser interest rates. Rollover balances are generally subject to the existing interest rate, while the teaser rate only applies to new charges. Furthermore, you risk being stuck with a high-interest rate if you can’t roll over the debt. Compounding the problem, you’re wasting time and energy trying to manage the debt that could be used to pay it off or settle it.
6. Apply For A Debt Consolidation Loan
Lending institutions including banks might be willing to sit down with the borrower and come up with precise debt consolidation loans with terms that you may be willing to work with. By putting your debt in one place and then responsibly repaying the entire amount, you will be able to save both money and time. This is an effective strategy to consolidate your debts.
7. Debt Consolidation Through Credit Counselling
Credit counseling is very beneficial to individuals who are late in repaying their debt. First, credit counseling will assist you in coming up with a workable savings plan and home budget. Moreover, the lending institution may be able to provide you with debt consolidation loans at affordable rates. You must try this to seek credit counseling to consolidate your debts.
8. Debt Assistance From a Relative or Friend
In case you run out of official channels of consolidating your debts, then you should consider reaching out to a family member or a close friend. Nonetheless, you should always ensure that you can be able to reach out to the mutual terms of the agreement. These types of agreements could easily put one back on track without necessarily having to meet lots of credit rating criteria and stringent requirements. If one has the means to repay a loan from an individual they know, then the chances are that their terms will be less expensive than that of a debt consolidation agency or a bank.
9. Taking Peer-to-Peer Loan for Debt Consolidation
You can also consolidate your debts through Peer-to-Peer loans. Peer to peer lending sites such as Peerform.com, Lending Club, etc is assisting by providing this alternative way of providing loans to debtors. What is the peer-to-peer loan process? All the peer-to-peer lenders use letter grade scoring. Once your application is approved, some of the lenders use an auction approach, where potential lenders bid to fund your loan. In other lending sites, your application will be put on the site’s platform for lenders to evaluate and approve your loan.
The advantage of peer-to-peer funding is that when you apply for a loan from a bank or credit union it involves a lot of paperwork and lots of hurdles to go through, which is not the case here. However, there is one stringent rule – that you must allow the peer-to-peer site to automatically withdraw your monthly payments from your checking account. And if you fail to do so in any month, you will be hit with a strong penalty.
Debt Consolidation: Conclusion
Recognize that debt consolidation does not eliminate your debt. It may make managing the payments easier. It may reduce the overall payments, though extending the life of the loan results in higher total interest paid on the debt. Don’t make the mistake of seeing the savings from debt consolidation as an excuse to resume the bad habits that got you into debt in the first place. Get control of your over-spending, and start paying off your debt. Don’t become complacent and end up in debt again but with even fewer options available to you. This is why the best advice we can give to someone consolidating all their debts in 2020 is to cut up the credit cards, live below your means, and never have to do this again.
Let us know in the comments sections what do you think is the best way to consolidate your debts.
What is debt consolidation
Home mortgage & HELOC