If you are one of millions of Americans struggling with credit card debt or trying to pay off debt, you may be wondering if a consolidation loan is a good or bad choice. It’s neither. You need to make sure it’s the right choice for you to help pay off credit card debt. There are a lot of debt management options to help you to get out of debt. Let’s look at the pros and cons of this option as well as explore some other debt help options that may better help you to reach your financial goal of becoming debt free!
First, you need to figure out which type of debtor you are. Look at the scenarios below and decide which best matches your situation.
Debtor #1 – This person comfortably pays monthly minimum payments to their credit cards and sometimes sends extra money to help pay down the principle quicker. This person needs a little help reorganizing their debt to one payment, seeks lower interest rates and is lucky enough to have an emergency savings fund for the family.
Debtor #2 – This person struggles to pay monthly minimum payments to their credit cards and sometimes misses a payment. This person is forced to charge gas, groceries and other living expenses just to make ends meet and does not have an emergency savings fund for the family.
If you closely relate to Debtor #1, a consolidation loan may be a good option for you. The benefit with this option is that a consolidation loan simplifies the process of paying your credit cards to one new payment and often with a lower interest rate if you have good credit. It can relieve the stress of having to manage multiple, sometimes dozens of credit card statements that are delivered monthly.
There are two types of consolidation loans: unsecured and secured. Secured loans are the most common, require collateral to obtain the loan, such as a vehicle, and if the borrower is unable to keep up with the loan payment, the collateral could be at risk. An unsecured loan doesn’t require collateral, but it is more difficult to obtain because borrowers, often, must have excellent credit.
There are several major drawbacks of a consolidation loan, however, and one is that the debt is not reduced. You still owe the full amount of the debt, and if you are Debtor #2 and not comfortably making your monthly minimum credit card payments and need a much lower payment, then a consolidation loan payment is not going to provide the debt resolution you need.
If you are comfortably making your monthly credit card payments but do not have 3-6 months of living expenses saved, then again, a consolidation loan is not your best option. Why? Roughly 35% of all adults in the U.S. have only a few hundred dollars saved for an emergency, and 30% have nothing at all. A credit card consolidation loan is only effective for people who are disciplined on making payments and do not have a need to take on new debt. If you have an emergency such as a house or auto repair, medical expense etc., and you do not have an emergency fund, then you are forced to open new credit. You could be deep in debt again in just a few years. And if during the years you are making payments on the consolidation loan you know you will have added expense, such as child going to college, vehicle purchase or even reduced income if retirement is approaching, then a consolidation loan is not in your best interest.
Also, getting a low interest consolidation loan can be difficult if you don’t have a high credit score. While it might seem nice to have only one monthly debt payment instead of several, a high interest consolidation loan can leave you in a much worse financial situation instead of better.
What if you relate more closely with Debtor #2 in the above scenarios? Your best option is going to be debt settlement, or a debt resolution program. Debt settlement is a true hardship program and is tailored to fit the needs of debtors who are either behind on their monthly minimum credit card payments or for the debtor who is current on payments but basically have to “rob Peter to pay Paul”, which means to discharge one debt to incur another. Debt settlement companies work with your creditors on your behalf to negotiate the debt down to an amount you can afford to pay. Your creditors will be helped to understand your financial hardship and why you cannot repay the full balances owed.
If you are struggling with credit card debt, don’t know how to pay off debt, think you may start to fall behind on payments or going through a financial hardship and you don’t know which option is truly best for you, call America Debt Resolutions! We are a Texas debt relief company that specializes in debt settlement. You will receive a professional debt consultation at absolutely no charge. A debt consultant will listen to understand your unique situation and recommend a program that is in your best interest.
America Debt Resolutions has proudly helped its clients successfully become debt free since 2006! The company is state registered, compliant with the Federal Trade Commission, 10th year accredited by the American Fair Credit Council, registered with the Office of Consumer Credit Commissioner and maintains an A+ rating with the Better Business Bureau!
Get educated on your options for living debt free and let us customize a debt resolution program for you! Call America Debt Resolutions today at 877-350-3328!