Debt consolidation is an effective, affordable, and manageable way to save you from the financial fatigue of having multiple credit cards with different due dates and amounts. On top of that, you’re struggling to make minimum payments. Here’s what you need to know about choosing the best form of credit card debt consolidation for you, whether it’s consolidation loans, or some other method.
Secure Vs. Unsecure Debts
You should first know whether your debt is secured or unsecured:
Personal and student loans as well as credit cards do not have collateral behind them. However, the lender may garnish your wages by getting a court judgment against you.
For a secured debt, a collateral backs up your loan. The collateral can be a car, property, or home. If you fail to repay a secured loan, that may result in a foreclosure on your property or repossession on your car.
Ways to Consolidate Unsecured Debt
There are multiple ways to approach debt relief, with each approach tailored to a specific situation. Some may work for you while others will not; therefore, you should do your research before deciding.
Below are three ways to consolidate your debts:
Debt Management Program
A debt management program helps minimize the interest rate on credit card debt, creating an affordable payment plan that eliminates the debt in between three to five years. Nonprofit credit counseling agencies provide these debt management programs. You can also learn about debt management at Freedom Debt Relief.
Advantages of Debt Management Programs
- Reduced interest rates lower monthly payments
- Educational material and useful suggestions are offered by your credit counselor on avoiding falling into debt again.
- Debt management programs make you avoid calls from debt collection agencies.
- It is not a loan, and you can withdraw from the debt management program anytime.
Disadvantages of Debt Management Programs
- A monthly fee is charged for managing your repayment plan
- Your credit score drops the first six months of joining the debt management plan, but it recovers if your payments are consistent.
- While registered in a program, you are likely to close all your credit card accounts
- Lenders can cancel the concessions on interest rate or charge late payment fees made before you joined the program.
Yet, this option seems to be the best debt consolidation approach as compared to others.
Personal consolidation loans can turn multiple balances into one single monthly payment. These can be accessed from credit unions, banks, and online lenders.
Advantages of Personal Loans
- Personal loan debt is unsecured
- The interest rate of personal loan is fixed
- You can pay off the personal loan before the payoff date without attracting penalties or fees.
- One can prequalify for a personal loan even before committing to it, enabling them to consider other deals
- A good credit score gives you a much lower rate than when repaying using credit cards.
Disadvantages of Personal Loans
- Only favor those with good credit scores before application
- Lenders charge origination fees for these loans
Also Read: How Do Credit Cards Work with Complete Guide
Peer-to-peer lending is a very good option of personal loans. Peer-to-peer loans connect the lender to the borrower without a middleman, such as credit unions or banks.
Advantages of Peer-to-Peer Lending
Fierce competition between lenders attracts low interest rates
The standards of qualifications vary since it is between individuals rather than individuals and institutions
It can help improve your credit scores as most lenders report your payments to credit bureaus
It allows loan repayment at a fixed monthly rate over a period of between three and five years.
Limited inconveniences since the whole procedure is conducted online
Disadvantages of Peer-to-Peer Lending
- Various fees can be applied to the loan, increasing the cost.
- Borrowers have no say on how their grade is established.
- The process may be slow as multiple investors can bid your loan
Taking out a personal or peer-to-peer loan to pay off your other bills could help you settle your debt faster. Consolidation loans also work as a part of an overall debt management strategy that may include budgeting and consistent repayment plans.
Ultimately, the best form of debt consolidation for you will depend upon your particular set of circumstances. The information above will help you tailor the solution you need to your situation.