Debt Consolidation

Ways to properly consolidate debt

A consumer may have many debts on his account. Each debt may incur different interest rates. Credit cards charge a high rate of interest. Other debts on mortgage, education and car, all have different, fluctuating rates of interest. It therefore becomes very stressful for a borrower to meet each one on a monthly basis. This is where debt consolidation comes to the rescue.

Debts can be consolidated into one inexpensive monthly payment, at a lower interest rate. Consolidation of debt helps avoid bankruptcy. Debt consolidation schemes such as Home Equity Line Of Credit or HELOC prove to be very useful as they offer tax benefits. There are various ways to consolidate debts. Some of them are as follows:
  1. Managing debts well by devising good repayment plans.
  2. Considering home equity loans, placing an upper limit on the credit available and securing the equity on the borrower’s home. There is some relaxation in the amount of monthly payments. The interest charged on these loans can be deducted from the tax. Generally, the interest is tax-deductible if the borrower adds his first mortgage to a debt consolidation loan. The sum should not exceed 100% of the appraised value of the property. This offers a great relief to the borrower.
  3. Investing in a life insurance policy to repay the debt faster. This amount could be deducted from the borrower’s life insurance policy if he is unable to repay. Insurance helps in transferring the risk of loss to the insurance company.
  4. Considering credit unions that charge lower interest rates on loans.
  5. Contacting a non-profit consumer credit counseling agency. Credit counselors devise debt management plans and enable the creditors to waive off fines charged due to late payment of bills. They also work on reducing the rate of interest on credit cards.
  6. Looking into retirement funds and other schemes to pay off the outstanding debt. A borrower could be penalized if unable to repay the same within 5 years.
  7. Negotiating with creditors can help to ease the pressure of repayment to some extent. The borrower can discuss the terms of credit with the creditor or lender to extend the time period of repayment. There are debt settlement companies that work on reducing the rate of interest through the debt settlement process.

How to handle short-term debt (credit cards)?

Short-term debts due to credit cards can create a hole in the pocket if not used judiciously. It is very important to manage these unsecured debts. One way is through debt consolidation. Late fines and high annual percentage rates or APR charged by the credit card companies are enormous. There are ‘skip-a- payment’ companies such as Next Month Online, to help borrowers pull themselves out of the crisis. These companies negotiate with the credit card companies to lower their APRs for the borrower. They also work on waiving off the penalty charges. A borrower can even declare bankruptcy so that the credit card companies release all debts. Credit card companies find it more appropriate and rewarding to ease their terms on bankrupt consumers.

Which debt to focus on first?

The best way to manage debt is to review it thoroughly. It pays to list the debts along with the rate of interest levied and the name of the company. Everything should be in descending order of the rate of interest. In the case of debts with higher rate of interest, transferring the balance to a credit card with a lower interest rate is a good idea. The following points help to decide on the priority of debt:

  • Make a list of your debt-details.
  • Pick out the debt having highest rate of interest.
  • Transfer the balance with high interest rate to the account with a lower rate of interest.
  • Understand the types of debts incurred. Revolving accounts created by credit cards keep on adding to the debt and hence need to be focused on first.
  • Installment accounts serving personal loans can be lower on the priority list. They are fixed amounts to be paid, at fixed rates of interest, over a fixed period of time.
  • Consider the debt snowball plan, focusing on the necessary minimum payments.
  • Maintain a balance between debt pay-offs and create a savings account.

 

Debt is a state of financial vulnerability and it is not advisable to drain out completely to meet a speedy loan recovery.

 

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