If you’ve been looking into ways to pay off multiple debts simultaneously, you must have heard of a debt consolidation loan. Let me recapitulate this for you. Consolidating your debt enables you to roll multiple debts into the same account, where you pay through a reduced, singular interest rate. After taking on this loan, you are only required to pay to a single creditor.
Not only does this streamline the repayment process, but also makes it more manageable, as you can eliminate what you owe through an EMI. Consistent payments can also help you improve your credit score over time. Further, I think this is a great way to get out of your debt cycle, as you cannot draw more loans during your consolidation tenure.
Understanding the nuances
However, while everything sounds great, a debt consolidation might not always be ideal. For instance, it’s not guaranteed that you’ll get a lower annual percentage rate. This depends on your creditworthiness and whether you have a high credit score.
Whether or not you qualify for a consolidation also depends largely on your creditworthiness. Further, while some consolidators can let you only pay the interest for the first few months, you still need to repay the entire amount you borrowed upon consolidation.
Essentially, a debt consolidation is still a loan and not an immediate debt repaying. Hence, it is only worth it if you’re sure you’ll be able to repay all the money you borrowed in the given tenure.
What if you don’t want to take on another loan to pay off your outstanding ones? In such a case, there are other strategies you can adopt. I have discussed a few of them here:
-
Debt management plan
This is where you approach a credit counselor to help you chalk out a detailed plan to enable you to repay your existing debts. Here, the counselor will look into your total debt amount, the individual interest rates, and the tenure for each. This way, you can have a bird’s eye view of the elimination process you need. They will help you budget and find a workable routine to pay off your loan. At the same time, they might even negotiate with some creditors to reduce your interest rate.
-
A balance transfer credit card
With this type of card, you can convert your previous outstanding loans from other credit cards into a single account at a 0% interest rate for a fixed amount of time. This is generally a promotional period which lasts up to 12 to 18 months. It can go a long way to help you manage some of the burdens of your debt.
-
Debt settlement
This strategy involves asking your creditors to accept an amount that is less than what you owe. This is done by a representative from the company or organization on your behalf. Essentially, in this strategy, you’re asking for a discounted payoff.
If your creditor agrees, you can essentially bargain a mutually satisfactory final amount you can pay off through EMI or a lump sum. However, this requires you to have a credit score that is high enough to be your backup.
Signing Off
Debt consolidation, while aimed at helping you get out of the cycle of debt, might not be the best option if you don’t have enough funds or do not feel confident about taking out another loan. Options such as debt settlement, a debt management plan, alternative budgeting, or balance transfer can be useful in situations.
I sincerely hope I have been able to help you with this list, which gives you a better idea of the strategy you should adopt to be debt-free.