If you are finding it hard to make both ends meet with mounting debt interest, then you are not alone in that dilemma. Studies show that in the second fiscal quarter of 2017, American credit cardholders had a whopping $784 billion debt. Now, this figure does not include debts such as vehicle and student loans. The cause of accumulating debts is common in the US and people are aware of the same. The skyrocketing interest on the total outstanding keeps increasing over the years. It makes you repay a lot more money than you have borrowed in the first place. Over the years, if the total outstanding is not paid on time, the accrued interest becomes difficult to manage, making people financially broke or bankrupt.
According to an article published on https://www.entrepreneur.com, seeking counsel is one way to negotiate the payment terms with your creditors. The experience can prove upsetting, but when you are neck down in debt, you do not have an option. You will need to talk to the creditors to come to a mutual settlement so that you can pay off the total loan amount instead of the remaining interests. The strategy will work or fail depending on your negotiation skills. Then, if you take the assistance of a credit counseling body, things can improve for the better. If you do not want to negotiate, here is how you can leverage debt consolidation to manage interest:
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How consolidation works
A consolidated loan is a robust tool to repay your small, multiple debts. With a low rate of interest, more of your money is utilized in paying off the actual amount you have borrowed instead of the interest. It will help you to become debt-free quickly and save your hard-earned dollars. Let us explain this point with the help of a suitable example. Say, for instance, you have $15,000 in credit card loan with a very high interest of 18 percent. If you manage to get a consolidated loan with a low-interest rate, you could save a considerable amount of cash and clear the outstanding balance in a short time. It is beneficial for you if you want to become debt-free fast and live a happy life with your family and kids.
If you become eligible for a five-year loan term for the above amount at 8 percent interest, the monthly payment is the same as when you used a credit card. You pay much less than what you paid using your credit card. Moreover, you manage to dig out of your debt two years before. It is a great opportunity that you should leverage to become debt-free.
Different options for consolidation
As far as debt consolidation is concerned, there are many options for you. You should learn to make the most out of them. However, you must weigh the pros and cons of all the alternatives before coming to a decision. Here are the available choices:
Credit card transfers
Some credit card agencies transfer your high-interest balance to a new card that will benefit you with a low or zero interest for a specified time. You get some months before the offer expires and during that time, you can choose to pay off the outstanding balance at a low rate of interest. It is a great opportunity, so grab it to become debt-free quickly. Besides, you can check the debt consolidation ratings of lending agencies before choosing one. Inquire whether they have such card transfer options or not. However, there are some disadvantages to card transfer options as it is for a limited period, which means you need to decide quickly. It is no use applying for the same once the offer expires. The other pitfall is that it comes with some transfer fees. If the charge is high, then there is no benefit of opting for card transfers.
401(k) loans
Though not all plans allow this, a few can opt for a 401(k) loan to clear off dues to creditors. The loan options may sound great but you can always borrow cash from yourself. There are some major pitfalls of 401(k) loans. Besides paying the interest, the due balance will be regarded as a distribution. If you are not a senior citizen, at least 59.5 years of age, you will end up paying a huge tax for an untimely distribution of the money that you take out. Again, if you become jobless or resign from your current company, you will need to pay off the entire loan in full immediately. It is the greatest disadvantage of 401(k) loans. Therefore, you must learn all the pros and cons and then decide. Else, you will face serious financial challenges in the days to come.
As far as the loan’s long-term perspective is concerned, the money you borrow loses its power to multiply. While you repay the loan over the years, you may miss the market opportunities when things become favorable and have increased your retirement income.
Personal loan
You can take a personal loan to consolidate your small debts into one. Then, there is no assurance that a personal loan will have a reasonable interest rate. On the contrary, you may need to shell out higher interests than you have imagined. The rate of interest on a personal loan depends on a host of factors including your credit score, earnings, and other essential aspects. If you have a poor credit score and bad payment history, you will not qualify for a personal loan with a low rate of interest. Therefore, do some research and then come to a decision.
Avoiding more debts
When opting for a consolidated loan, avoid taking more debts. Make sure you understand the cause of the debt. Check your bank statements to see in which areas you have spent money unnecessarily. If you have bought too many clothes when plagued with debt, then that is the cause of your financial distress. Check these bad habits judiciously. Stay focused on how to pay off all loans quickly and lead a happy life.
Conclusion
Use debt consolidation to pay off your expensive loans in a short time. Save money and do your research to make healthy financial plans.