Debt Consolidation: Does It Fix The Problem?
Chances are, if you’re in debt, you have multiple sources from which that debt stems. Credit cards, bank loans and other types of unsecured credit can pile up before you know it. One of the most annoying features of paying off debt is keeping track of everything you owe. Sometimes you miss a payment simply because you never knew you needed to make it. When debt accumulates in this way it becomes stressful to try and tackle it altogether. Debt consolidation is meant to help with this issue by taking all of your debt and compiling it into one lump sum. With multiple debts rolled into one debt the payment process is streamlined, but does it make consolidation the right choice for you?
How Does Debt Consolidation Work?
Debt consolidation is a very straightforward way of debt resolution. The main goal is to combine all of your debts into one debt amount and condense your monthly payments to make sure all of your debts get taken care of at the same time. This is an attractive offer for those who feel like they don’t have a handle on all of their debt payments. There are two main ways to consolidate debt: with a secured method and an unsecured method.
How to Consolidate Your Debt: Secured vs. Unsecured
Secured Debt Consolidation
Those with collateral can use it to secure a loan and consolidate their debt. The collateral will act as an insurance policy to the lender, ensuring repayment of the loan. Generally, the amount of initial debt must be substantial and the collateral must be significant in its own right. Those who choose this method of consolidation do so in hopes of receiving a loan with a low interest rate while absorbing a higher amount of risk. Oftentimes the risk is to the borrower’s house or car and if the loan cannot be paid back the collateral is then taken by the lender. Unless you are confident in your ability to pay back your loan this is an exceedingly risky move to make.
Unsecured Debt Consolidation
Many people lack the necessary collateral to get a secured loan for consolidation. Those people turn to unsecured loans. Without the security of collateral, the interest rates grow largely due to the increased amount of risk the lender takes on. Many times the interest rates you incur from an unsecured loan end up being larger and more damaging than any rates you had beforehand. You may end up paying more in the long run with this method.
5 Pros and Cons of Debt Consolidation
- Multiple high-interest debts can be consolidated into one lower-interest loan. Instead of having many debts with varying interest rates, you can combine your debt into one lump sum with one interest rate. However a single loan may have an overall higher interest rate, causing you to pay more. In many cases a consolidation loan yields a higher interest rate than your individual debts, causing you to pay more overall.
- Debt consolidation loans are available from banks, lenders and other reputable companies. You’re still borrowing from well-known financial institutions. But if you do decide to borrow and create a structured plan your payments drag out due to smaller monthly payments needing to be made. The length of time you remain in debt is extended as the method of payment is slow.
- You only make one payment towards your debt per month. Consolidating your debts limits you to one payment per month, helping you keep better track over your monthly budget. If you end up missing any payments you’ll have a high interest rate to contend with, potentially ruining the progress you’ve made.
- Debt consolidation can result in only minor changes to your credit. In some instances a debt consolidation plan can result in minor to no changes to your credit score. However, with the length of time you’d be paying back your consolidated date it’s more possible your credit will suffer rather than improve or stay the same.
- With good credit, collateral is not always needed for consolidation. Those who maintain good credit have a better chance to get a consolidation loan without collateral or a co-signor. Those who do not have stellar credit will need to use a co-signor or use their car or even their house as collateral. Failure to pay back what is owed can result in these assets being seized.
An Alternative is Debt Settlement
People don’t relish the thought of putting themselves at risk in any way. With the risk to your house and car on one end and the risk to your current and future finances on the other it doesn’t leave you with many options with debt consolidation. These problems are solved with debt settlement through Guardian Debt Relief. Debt settlement can help you to lower your payments while also lowering your overall debt. The risk to you is only in keeping up with your payments, which are flexible and work with your budget. After making several deposits into an escrow account Guardian can then help to negotiate your debts down with the creditor and work quickly to close the gap between you and debt elimination. With this method of debt recovery, you don’t have to worry about insane interest rates or putting your car or even your home at risk. Keep your assets, reduce the amount you owe and find debt freedom faster with Guardian Debt Relief. Take the first step to knowing more about debt consolidation and contact the debt relief professionals at Guardian Debt Relief today.