New credit cards seem to appear almost everyday in the mailbox, tempting consumers to apply and instantly shop; many consumers have multiple charge accounts open with several entities, from a basic Visa or Mastercard to a large retail store. Although credit cards are extremely convenient when cash funds are low, they can soon drown the consumer in a large debt. What if consumers have several large balances on their credit cards and they find it difficult to pay the monthly minimum payment? Enter debt consolidation.
When consumers find themselves in financial trouble, it is natural to look for a way to cut monthly expenses; this process includes only paying the minimum on the multiple credit cards. However, the minimum on each card can be difficult to pay as well. One form of relief is consolidating the debt into one large lump sum. As a result, the consumer will only pay one monthly payment that is commonly lower than paying separate minimum payments to various cards.
Consumers looking for the right loan for consolidation should begin with a lot of research about each business that is offering credit relief.
Consolidating Debt at Your Bank
The majority of people who have credit cards will also have at least a checking account with a local bank. Consumers should ask their banker if they offer any form of debt consolidation or personal loans. Depending on the consumer’s credit and history with the bank, it may provide both forms of services. A consumer’s personal bank is the best place to start since this entity knows the person and his or her spending habits.
Traditional debt consolidation loans do not require a form of collateral, such as a piece of property. These loans are offered to consumers with good credit but with large balances on their credit cards. The bank will look at all the unsecured credit card debt and loan an amount to the consumer that will pay off the balances; the consumer would then pay the bank one monthly amount instead of paying the creditors directly.
In essence, consumers have “paid off” their credit card debt and are now paying one loan debt to the bank.
Consumers should be wary of personal loans offered as a form of consolidating debt. Traditionally, personal loans need to be secured with a form of collateral; for many consumers, the collateral is their home. If consumers must take out a personal loan to pay the credit cards, instead of using a debt consolidation plan, they should read the fine print carefully. Consumers that default on a personal loan can find themselves in foreclosure when the bank tries to collect their money. In general, it is not ideal to use secured debt, like a mortgage, to cover unsecured credit card debt.
If a consumer does not have a checking account, or the bank will not lend any money, it is good practice to visit several local banking entities to compare plans. Each bank will normally offer either the traditional consolidation plan or the personal loan option with varying interest rates. The consumer should read over all the fine print before deciding on a plan. Interest rates can be deceiving at first.
Consumers should compare their possible loan choices with their credit cards; the new interest rate should be substantially lower than the credit cards, but it will normally be in the double digits. Although this is still a high interest rate, it will commonly be lower than the credit cards’ rate that can be in excess of 20 or 30 percent. The lower interest rate is also stretched out over a longer time period than credit cards, so the consumer will see a significantly lower monthly payment amount.
An extremely low interest rate does not guarantee that the particular loan is the best choice; hidden fees, called “points,” may be strategically placed throughout the loan’s life that can add up to more income for the bank, rather than helping the consumer. Potential loan applicants should read over the entire loan document, or even have a tax or law professional help with the analysis.
Many banking entities work exclusively from their website. Consumers can search for a number of different loans from various businesses to obtain the best deal. However, the online world is full of scams; consumers should research each entity to ensure that they are legitimate loaning companies. The Better Business Bureau is a smart place to start to verify the company’s worth. In addition, consumer review websites can also give the consumer a better view of the internal business dealings of each company.
In the end, any new loans should be carefully read and analyzed for the best deal for the consumer. Credit relief should be available to anyone who has found themselves in a high-debt situation.
Through debt consolidation, consumers will find peace of mind and control of their finances.
Debt Consolidation without a Loan
While there are several options available for those looking to consolidate their credit card debt, the best approach is the one that is available to you. Often debt consolidation programs that DO NOT require a loan are the best, or only option. Evaluate the possibilities and consider the drawbacks associated with each credit relief and consolidation strategy. The best option will be the one that balances debt relief or consolidation with the fewest, or the least detrimental, drawbacks.