This year rocked for you. You purchased concert tickets to see your favourite band in Sydney, and of course, you needed a new outfit for the show. The concert was at least four hundred miles from your home requiring you rent a vehicle and reserve overnight accommodation. In total, your splurge costs over $3,000 on this one event, and let’s not mention the other road trips, shopping sprees, and other experiences that contributed to your maxed out credit cards.
By the year’s end, the reality of a budget gone wild looms like a dark cloud waiting to rain down on you, and soon you will find yourself doing whatever it takes to keep your head of above water. You have a great job with a nice salary, but when your credit card payments ballooned to several hundred dollars a month, the money was not enough to get you through the month. At some point, you will become delinquent with some of your debts. However, there is another way.
Continue reading to learn more about debt consolidation and how it can relieve some of your debt pains.
What Is Debt Consolidation?
Debt consolidation is simply the process of combining debts to lower monthly payments and prevent borrowers from going into delinquency. Depending on the type of consolidation, borrowers might find themselves also getting financial counselling, in addition to financial assistance. Borrowers can consolidate in three major ways.
Debt Consolidation Loans Versus Home Equity Versus Balance Transfer
The first method is through a debt consolidation loan. Financial institutions like Latitude for debt consolidation allow customers to borrow a lump sum to pay for existing debt. Another method of consolidating loans is through home equity loans. Homeowners who want to reduce the amount of money they spend in debts can borrow against the equity of their home.
Alternatively, borrowers can take advantage of zero-interest balance transfers, which will allow them to consolidate credit card debt. The difference among the three types of consolidation methods is that consolidation and home equity loans can cover all debts where balance transfers typically only consolidate credit card debt.
The Benefits Of Debt Consolidation
One of the primary benefits of debt consolidation is that it reduces the amount of money you pay out in a single month to debt, whether it’s credit card or other existing obligations. Furthermore, because you all of your obligations are combined, you only pay interest on one amount as opposed to interest on several debts, which can quickly add up. In essence, consolidation reduces the amount of money you pay in interest. For borrowers who have delinquencies related to overextending themselves, debt consolidation not only allows them to get a handle on their finances, but it also gives them the opportunity to re-establish a good credit history.
The Disadvantages Of Debt Consolidation
Debt consolidations major disadvantage is in relation to the fees incurred when taking out loans. If seeking help through a debt consolidation program, borrowers can expect to pay origination fees to open the loan, and some outfits will charge a termination fee for paying off the loan early. Moreover, these loans usually stipulate borrowers do not apply for any more debt, and because these programs make inquiries to the credit file, this can further damage a credit report already in disrepair.
Homeowners who use their home’s equity to pay for existing debt face a situation where they could owe more on the home than its worth if property values drop significantly. Finally, those who choose to consolidate through credit cards typically have to pay off the balance before the low-interest introductory rate balloons.
Reducing Debt Through Consolidation
Credit is a great and glorious benefit in this day and age when the costs of goods and services can exceed our immediate income. A pitfall of taking on debt, though, is that it can seriously damage our credit if we overextend ourselves. However, a good debt consolidation plan can help repair credit and put borrowers on a path to financial health.