Do you have plans to borrow a debt consolidation loan to help pay off your multiple credit obligations? While this is an effective way for you to get out of debt, you need to make sure that it is the perfect solution for you. There are a lot of debt relief programs that you can use to aid yourself in your quest to achieve debt freedom. You have to choose the right option that is perfect for your specific financial situation.
If you take notice of current reports, you will realize that there is a need for consumers to get serious about debt relief. Apparently, the outstanding balance in almost all debt categories increased. That is not really alarming yet – until you find out that the average delinquency rates are rising with it.
In a consumerist society like ours, the rising use of debt is an indication of consumer confidence. That means people are more confident in spending their money. Since the economy is reliant on consumer spending, this will make the economy stronger.
But only if the debt is being paid back. If the delinquency rates are rising, that means people are borrowing more than what they can afford. This can eventually lead to an economic crisis.
If you find yourself with a growing debt, you need to start thinking about your options to pay it back. Among all your options, consolidating debts seems like the first thing that comes to mind.
Ask these questions before borrowing a debt consolidation loan
While borrowing a debt consolidation loan is effective, you have to make sure that it is the perfect solution for you first. If it turns out to be the wrong solution, you will just end up making your situation worse.
Fortunately, there are a couple of questions that you can ask yourself so you can be sure that this is the right debt solution for you.
What is the interest rate?
There are a lot of things to consider when borrowing any type of loan. The interest rate is among the most important that you should look into. This will affect your monthly payments. The lower the interest rate, the better it will be for you. Since you are using this to consolidate debt, you need to get the average interest rate of all your debts. Then, check if the debt consolidation loan that you will borrow has a lower interest rate. If not, then there is no sense in pushing through with the loan. You will just be spending more if you pursue this option.
Do you have a good credit score?
The best way to get a low-interest rate on a loan is to have a good credit score. When you have a good score, it is a strong indication that you can be trusted with credit. You are responsible enough to pay what you owe. The lender or creditor will not feel the need to protect themselves from the possibility of you not paying them back – which is usually done through a higher interest rate.
How much is your monthly payment?
This is actually a very important question. It does not matter if the interest rate is high or low. It will also not matter if you have a very good credit score. If you cannot afford the monthly payments, there is no sense in using a debt consolidation loan. According to statistics, there are more Millennials who are delinquent with personal loan payments compared to the older generations. You need to be smarter with this particular debt solution if you want to use it to achieve debt freedom. If you cannot pay this back, then you are just wasting your time, effort, and money. It might be best for you to just leave your debts as it is.
How long is the repayment period?
A debt consolidation loan can be longer or shorter. It depends on your specific financial situation and goals. If you need a lower monthly payment because of your limited budget, then you need to get a loan that offers a longer repayment period. However, if you wanted to get a debt consolidation loan so you can save money, it is better to get a shorter payment period. A shorter the period, the less you have to pay on the interest.
Knowing the repayment period will also help you understand how long you have to adjust your budget to accommodate the payments. If you have goals, you may have to postpone them until after you have paid off this debt – or at least paid a significant part of it.
Know the alternatives to debt consolidation loans
In case you find that the answers to the questions prove that a debt consolidation loan is not a good idea, do not worry. There are other options for you to look into for help. And we do not mean borrowing a personal loan. These options will still consolidate your debts but will not involve a loan.
Among your other options include debt management – which involves the help of a credit counselor. You will create a debt management plan that will include a customized repayment plan based on your financial capabilities. This will be presented to the creditors and lenders for approval. If they approve, your credit accounts will be frozen and you will pay down your balance. You just have to submit one amount to the credit counselor and they will be responsible for distributing that to your different creditors and lenders.
Another option is balance transfer. You get a new credit card that offers a 0% interest introductory period. That means you can transfer all your balance in this new card and every payment that you will make will all be credited to your principal balance. At least, this is until the introductory period is over. To really benefit from this, you have to make sure that you can pay off all the debt before the 0% interest expires.
If you need a debt reduction, then you might want to go for debt settlement. The whole concept of this debt solution is to negotiate your balance with the creditors and lenders. You will ask them to allow you to pay a portion of the debt and have the rest forgiven.
Consider these options if a debt consolidation loan is not possible.