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| Debt consolidation as a way to curb highinterest |
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Struggling with loans? This is not an unusual trend in the world because people have resorted to financing different projects using borrowed money.
It was estimated that by the year 2018, cardholders in the United States had a total debt of about $784 billion. The figure does not account for other sources of debts and student loans. High interest ratesarefamiliar to most people, and debts continue to surgedue to unpaidloans. Paying off aloan can be difficultsince the debtors end up paying off more money than the borrowed amount. But what if you could get an alternative, one that charges a lesser interest rate, to clear off the initial liability? This is the idea behind debt consolidation, whichshould be usedto avoid the accumulation of bad debts. What does debt consolidation mean?
Debt consolidation entails taking out a loan to finance various other loans. This type of loan functions like any other and chargesinterest. The debtor utilizes the amount to paythe previous amount, with the intent of being an irresponsible debtor. Debt consolidation loan only makes sense if you can get it at a cheaper cost. Also, it is well-knownthat this type of loan is inexpensive compared to paying off several credit card loans.
It is important to have sound financial advice before resorting to debt consolidation loans. People with little knowledge of how theyfunction can end up taking too large an amount, which will createmore difficulty in remitting the regular monthly installments. It’simportantto evaluate the appropriate approach to take, in terms of choosing the best financial institution with the cheapest offer and flexible terms.
When it comes to the available choice for debt consolidation, there are several options, each with its advantages and disadvantages. The following four options are available to all people.
Credit card balance transfer
Some credit companies allow you to transfer balances that have a higher interest rate to a new card. The new car chargeslower interest, sometimes 0%. The offer is onlyfor a predefined period. Aggressively paying down the debt will clear the balance in the shortest period possible. The major advantage of this option is that credit card balance transfers lessen the burden of interest accumulation.
One of the downsides is that there is a balance transfer fee.On average, the financial companies offering these services charge between 3%-5% of the total transferred amount. If the amount happens to be too high, it waters down the importance of seeking a credit card transfer option. Also, the promotional period is short. After the introductory, the person is given twenty-one days to clear the balance, after which the interest rate begins to increase. If you fail to clear off the balance within the given period, you will end up paying more than what you were escaping.
Home equity loans
Property is an asset that is valued as a bolster towards your access to any form of a loan. In the case of credit card transfer, the evaluators assess the worth of the property, then subtract the total amount of the balance you have for the previous loan. The available value can be sufficient enough to pay off your debt. Since the loan is primarily secured by your property, you can qualify for a loan with a cheaper interest rate. This kind is sometimes referred to as a home equity loan if that is what you use as collateral. The major drawback is that you could end up losing your home since you use it as to back the loan.
401(k) loans
Technically, 401(k) loans are not actualloans, since they do not involve an evaluator or review of the credit history. They are referred to as a way to access yourretirement benefits early, but with a penalty. The principle plusis later repaid at the stipulated rate, like there was no transaction has happened. The other major downsideis that if you get laid off, the loan has to be paid immediately.
Personal loans
Approaching a bank for a personal loan is another option that a person can choose to finance debts. Although it can be a good idea, there is no guarantee that you will find a financial institution providing good interest rate. In most instances, the banks charge high interest rates, and choosing to take this route can increase the likelihood of further debts. Several factors dictate the possibility of taking a personal loan, and the most important one is income. Ideally, the higher the level of earning, the higher the chance of securing a personal loan, and negotiating the interest rate with the bank.If you have the low credit score or low income, then the chances are that you will be seeking for bad credit loans which can be found here that comes with a much higher rate of interest.
How to minimize racking up more debts
Debt consolidation is not a magic solution, although it can help you to pay off ahigh-interest loan. For it to function properly, you’ll need to make modifications inyour lifestyle, to ensure you don’t pile up a lot of additional debts. Before executing any of the above plans, make a precise plan on how to repay your consolidation loan, by utilizing the steps illustrated below:
Using debt consolidation loan to pay off your credit card debts can be a noble idea. Before resorting to doing so, though, consider evaluating the drawbacks and pros. Doing your homework will assist you to tackle your debts in the right manner.
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"Act as if it were impossible to fail." Dorothea Brande
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