Benefits of Debt Consolidation
A debt consolidation loan is a viable solution for consumers buried in a mountain of credit card debt. The strategy is simple – take out a new loan and use the proceeds to pay off current debt. There are drawbacks, which will be discussed in the next article in this series; however, consolidation offers many valuable advantages.
Of course, one should investigate all available options before agreeing to take out a debt consolidation loan because it is a long-term agreement. Other debt relief solutions, including debt settlement, credit counseling, and bankruptcy, may be more appropriate for your situation. When considering consolidating your debts, including the following advantages in your assessment.
Debt Consolidation Is the Low-Cost Solution
Unless you have a sufficiently high credit score to qualify for a new unsecured loan, which is not likely if you are currently overwhelmed by debt payments, the debt consolidation loan will have to be secured in order for you to receive a low enough interest rate to justify the consolidation loan. Depending on the nature of the assets pledged, there may not be any fees charged by the bank.
For example, if you were able to give the bank gold coins equal to the value of the loan as collateral, you would likely not have to pay fees. On the other hand, if you pledge real estate as collateral, you may incur fees for the bank to appraise the property and file a lien. Either way, however, your total costs are typically lower for consolidating your debts than other relief strategies.
Debt Consolidation Is Fast Relief
Other debt relief strategies can take months or years to execute. For example, debt settlement requires that you save up enough money to fund a lump sum payment to creditors. Bankruptcy can take two to three months to work through the court system, and in the case of a Chapter 13 filing, can take many years before a debt is finally paid off. Credit counseling debt management plans often span three to five years to get out of debt. Debt consolidation loans can be secured in a few hours, at a minimum, or no more than a month if a real estate appraisal is required.
Filing for bankruptcy, settling debts, and even a debt management plan can negatively affect your credit score, probably for years. Consolidating your debts may increase your score according to Forbes based on you paying off multiple debts and opening up a new credit line. In light of this, you might wonder why your credit score is dangerously low. This is because you were already behind your payments in the first place. Of course, debt consolidation should not have any adverse effects on your existing g score.
Using Debt Consolidation Requires No Special Expertise
Unlike bankruptcy and debt settlement, which can be complex and beyond some people’s ability to self-execute, debt consolidation is simple. There is nothing wrong if you prefer to work with a debt consolidation professional. However, you can also undertake this program all on your own.
Convert High-Interest Debt into a Tax Deduction
Consumer credit card debt is not tax deductible. However, the interest paid when using a home equity loan to fund a debt consolidation can be deducted from your taxable income. The effect would be to lower your interest rate by 15 to 25%, depending on your tax bracket.
Use Your IRA to Qualify for Debt Consolidation
Because the IRS allows you 60 days to roll over an IRA or other retirement accounts, you can use the money to finance a debt consolidation loan when all other funding sources have been denied. You must be organized because the entire transaction must be completed within the 60-day period and the money re-deposited in a new IRA account, or you will have to pay income taxes plus significant penalties for the early IRA withdrawal. The lender does not have to be told the source of the money. Simply arrange a new loan contingent on you paying off the same amount of higher interest debt. Once you are approved, withdraw the IRA funds, pay the debts, then sign your new loan and re-deposit the money in a new IRA instrument.
The More Obvious Benefits of Debt Consolidation
This article would be remiss if it did not mention the obvious advantages of debt consolidation:
- By securing the new loan, you should receive a better interest rate than you would with unsecured credit card debt.
- You may choose to extend the term of the loan to lower your monthly payment. Once your finances are in order or your income grows, you can always add principal to each month’s payment to pay off the loan faster.
- Paying off your credit cards would open those credit facilities again for your use. It goes without saying that going back into debt is not a good thing. However, rebuilding your credit rating is possible with credit card use. That is if you are judicious with your card usage. It is important that you are disciplined enough in paying back your monthly bills in full and on time.
With all the benefits debt consolidation affords, it could be the answer you’re looking for. However, you should always investigate your financial options. It is beset to understand the cons of consolidation before selecting it as a debt relief solution.
Is debt consolidation the right financial move for you? Find out which financial situations consolidation works best for and what options are available.