Debt consolidation conjures up different thoughts for different people. In certain situations, consolidating multiple loans into one lump sum is a wise option. However, consolidating multiple loans without much foresight could actually lead to damaging financial results. It is important to know all of the options available for handling consumer debt issues.
There are different types of consolidation plans that work for different situations.
Standard Debt Consolidation
This is the type of plan that most people think of. This involves a person getting a loan from a third party who agrees to consolidate all of the person’s debts into one loan. Most people associate this type of plan with credit card debt. An individual might work a deal with a credit union or lending institution to make one new loan to pay off the debt compiled on different credit cards.
Home Equity Loans
A home equity loan gives a person the ability to borrow against the equity in their home. The interest payments are often lower than credit card interest rates. The other advantage is that the borrowing limits might be much higher than other loans. However, that can backfire. The debt is secured against the home so if a borrower misses payments, he or she faces foreclosure. The home equity loan gives the borrower the opportunity to make payments with lower interest rates, but it ups the stakes by putting the house on the line in the event of missed payments.
Transferring one credit card balance to another card is another way to consolidate credit card debt. If a borrower has a credit card with a large limit and low interest rate, it might be possible to transfer the debt owed on credit cards with lower limits and higher rates to the high limit card. This enables the borrower to make one payment each month as opposed to several with varying interest rates. If a borrower does not have a single card with a high limit, this option might still work if a borrower can at least reduce the payments by one or two payments by spreading multiple high interest rate debts between two lower rate cards.
Before pursuing this option, the borrower needs to make sure that he or she will actually save money. Simply transferring a balance from one card to another will not help if the rates are the same or close or if the card companies charge a balance transfer fee.
Consumers have multiple options to try and simplify their credit situations. These plans often offer lower payments, but may have stricter penalties for missed or late payments. Of course, it is important to know all of the pros and cons of each plan before taking action.
Beware of Debt Consolidation Scams
Sometimes debt settlement companies advertise themselves as offering ‘debt consolidation.’ What they really mean is that they want the borrower to pay monthly to the debt settlement company or a controlled bank account. Then, they will make settlement offers to credit card companies and debt collectors, trying to get a reduced payoff rather than pay the full debt.
Get a Consumer Credit Attorney to Help
If you are struggling to pay your debts, an attorney experienced with bankruptcy, debt settlement, and other debt reduction options may be your best bet for independent, unbiased advice at a reasonable price.