So you have accumulated debt and are now looking for a way out. Well, the good news is that you are not alone. According to a survey by Pew Charitable Trust, 8 out of 10 Americans have some form of debt. Even more surprising is the fact that about 47% of baby boomers are still paying off their mortgages, well into their retirement.
Facing debt can be incredibly stressful and frustrating. However, it does not need to overwhelm your life. There are ways you can get out of debt regardless of the severity, and it all begins with you taking control. Before considering a loan as an alternative, you must take a look at your overall debts, as it will give you perspective on how severe your financial situation truly is. From there, you can come up with a debt strategy and decide how you will tackle the situation. Some people pay off debts according to due dates while some look at those debts grossing the highest interest such as credit cards.
Should you get a loan?
Another route would be getting a debt consolidation loan and clearing all your outstanding bills; leaving you with one debt payment every month. Some may question whether they will be able to get another loan due to their heavy debt or past non-payments.There is a range of personal loans available to people even with a low credit score such as this Finnish example.
Pay Less Interest
One of the main attractions is the possibility of paying less interest on your debt than you are now. Many individuals are struggling with debt list credit cards and the high-interest charges as their main debts. Due to its unsecured nature, credit cards can carry interest rates exceeding 15 percent and penalty interest charges of almost 30 percent. So if you default on a payment, that is a size penalty charge added to your existing debt.
It is essential that you do adequate research and take advantage of the comparison tools available to look at your credit card rates and the rates being offered by lenders. If all of your credit cards have higher rates than the loan you are applying for, then you can save interest fees each month by combining them into one single payment.
Does Not Increase Your Debt
Another reason a consolidation loan may be a good avenue is that it does not increase your debt. By taking the loan and paying off all existing loans, your debt level remains the same, but you have now streamlined your debt payments every month. Paying off all debts means you avoid further interest and late charges from your creditors. With every lien and default payment placed against you, your credit score suffers.
Avoid Further Charges From Creditors
Credit cards and other credit accounts typically have additional fees attached to them. If you are struggling with your current level of debt, you may be paying several late and account fees that are unnecessarily eating up your budget. Paying off these credit bills and removing these fees not only frees up money in your budget but also stop your credit score from being further damaged.
Improve your Credit Score
Debt consolidation loans are a popular way for persons to streamline their debt but they are useful in many other ways. One of those other benefits is that it can help rebuild your credit score. With every late payment or lien, your credit score gets lowered a few points. With a debt consolidation loan, these bills are all reduced into one consolidated loan payment each month. This means a better payment history and no more missed bills.
Your credit cards and other credit accounts are also reduced to zero. To lenders, this is attractive since it indicates that you have a low credit utilization ratio. A loan is considered an installment debt and therefore, is not a part of your revolving debt like your credit cards.
It is essential that you practice self-discipline, however. Closing the smaller credit accounts and making sure not to charge on the newly reduced accounts again is a vital skill on the road to financial redemption.
Avoid Multiple Interest Rates
Finally, a debt consolidation loan may be better for your spending and budget. As controversial as it sounds, by summing all debt payments into one single payment every month you are removing the individual interest rates charged on each debt. This could lead to less interest being paid every month, freeing up your budget.
It is also possible to shorten your repayment term on your debts. Credit cards can often carry interest rates of 18 percent and upwards and these rates are usually calculated at the time of offer. Paying the minimum on your credit card while high-interest charges are added each month means you are making a smaller dent in your debt than you thought. At this rate, you will end up paying much higher interest overall and also take longer to repay. By paying off the line of credit and then repaying the loan over an agreed period of, say 5 years, this means you can have all of your debt cleared in 60 months; loan included.
If you are considering a way to get your finances back on track, you may want to consider a debt consolidation loan and the benefits it can bring you.
Author Bio: Lucy Wyndham is a professional freelance writer with many years experience across a variety of sectors. She made a move to freelancing from a stressful corporate job and loves the work-life balance it offers her. When not at work, Lucy enjoys reading, hiking and spending time with her husband and two children.