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How Does Debt Consolidation Work and Other Facts About Consolidation

How Does Debt Consolidation Work and Other Facts About Debt Consolidation

When it comes to trying to pay of your debt it can be hard when you have multiple accounts open. Read on to learn how does debt consolidation work.

Did you know that Americans now have more debt than ever?

In fact, this debt amounts to a hefty $13 trillion–and this number is likely on the rise.

Debt can sneak up on all of us, especially given life’s range of expenses. Student loans, vehicle financing, and mortgages may grant education, mobility, and home ownership, but they still all equate to debt.

Luckily, if you are struggling with debt management, there are options. One of these is debt consolidation.

How does debt consolidation work, and is it right for you? In this post, we answer these questions and more.

Keep reading for insight!

What is Debt Consolidation?

Most people accrue debt from a variety of sources. You may, for example, have credit card debt in addition to an auto loan or home mortgage.

This is very common, and it’s not necessarily a problem. It is possible to have “healthy debt” if you are a responsible borrower and if you can comfortably make your monthly payments.

Yet healthy debt can be hard to come by. Plenty of loans have high-interest rates, which can quickly get burdensome and keep you from saving what you need to be saving!

A lot of people also juggle multiple monthly payments. It can be tough to meet these, especially if you’re living paycheck to paycheck. (In fact, most Americans do!)

Unexpected situations such as family emergencies or medical expenses can be an additional challenge. These can add more to your debt and stress levels.

If you find yourself missing payments on any of your loans, you may face late payment fees. Credit card balances are also subject to potentially high-interest rates.

Debt consolidation strives to alleviate the stress of these potential situations. When you consolidate your debt, you lump your debt into one, single loan. This results in just one monthly payment and–in most cases–less interest due.

How Does Debt Consolidation Work?

Debt consolidation sometimes sounds too good to be true. How does it work?

First, it’s important to note that there are, in general, two ways to consolidate debt: with a credit card balance transfer or a debt consolidation loan.

Both of these have the same goal, which is to get all of your debt into one monthly payment. Plus, they also strive to reduce interest and fees.

Credit Card Balance Transfer

For people with a lot of credit card debt, this is a great means of consolidating. Users simply transfer all of their debt to one credit card. They must then pay off this balance within a given time frame.

Most people will seek out new cards that offer a 0% balance transfer APR and/or a $0 balance transfer fee. Plenty of credit cards offer these terms!

These terms mean that balance transfers won’t be subject to any fees. Once you transfer a balance, you won’t have to pay interest on that balance for a given period of time (sometimes up to a year).

If you aren’t eligible for such offers for any reason, have no fear. You can always transfer your credit card balances. These, however, will be subject to APR and/or transfer fees according to your card’s terms.

For this reason, identify your card’s balance transfer terms before you make a decision.

Debt Consolidation Loan

Another way to consolidate your debt is to take out a debt consolidation loan.

With this, borrowers take out a loan valued at their total debt. Generally, this loan is fixed-rate, meaning that its balance will have the same interest rate for the entire repayment period.

With this debt consolidation loan, borrowers pay off all of their existing debt. They will then work on repaying that loan in a given amount of time, generally at a lower interest rate.

Debt consolidation loans are ideal only if they do offer lower interest rates and fees than a borrower is paying on other loans.

You can get debt consolidation loans from a variety of sources. What’s more, they don’t have to be called a “debt consolidation loan” to count. Low-interest personal loans can also suffice.

Is Debt Consolidation Right for You?

Debt consolidation can be a relief for most borrowers, especially when it comes to reducing payments, interest, and fees. But is it right for you?

In general, debt consolidation is ideal for people who could benefit from a single monthly payment (rather than several).

It’s also the right choice for individuals who aren’t 100% drowning in debt. In general, your debt shouldn’t be more than half of your current income. If it is, it will be really tough to pay off that debt, even after it is consolidated!

Credit score can also play a role. In general, people with good to excellent credit are more eligible for 0% balance transfer terms on credit cards and low-interest consolidation loans.

If you have a lower credit score, you may struggle to find a consolidation method that actually saves you money.

It’s also important to have a plan in place once you do consolidate your debt. This plan should incorporate income sources and repayment terms.

Remember: debt consolidation doesn’t get rid of your debt. It only reorganizes it, in an attempt to reduce interest paid.

Next Steps

If you’ve decided that debt consolidation is right for you, begin by choosing how you wish to consolidate your debt. Is credit card consolidation right for you, or is a debt consolidation loan the way to go?

Next, start researching. Take your time to identify the best balance transfer terms and/or low-interest consolidation loan.

If you do intend to take out a loan for debt consolidation, browse lenders wisely. There are a lot of scams out there when it comes to debt consolidation, so look only for reputable lenders.

We also recommend inspecting your credit score before you hunt for offers. Remember: the higher your score, the better for securing terms likely to make debt consolidation worth it.

Final Thoughts

How does debt consolidation work? Debt consolidation involves lumping all of your debt into one loan to reduce payments and interest.

In general, debt consolidation can be a useful tool for individuals with debt that doesn’t surpass half of their income.

Are you ready to consolidate your debt? Apply for a loan now!

What personal loan amount can I get?

Happy merchant avoiding EMV chargebacksIn general, personal loan amounts range from $2,000 to $50,000.  Borrowers with credit scores over 680, low debt utilization and robust income win amounts toward $50,000. Those not hitting those marks tend to get less. What are the criteria for determining personal loan amount?

It’s certainly not what you need, no matter how much you need it. Your wedding expenses bill of $30,000 or your remodel estimate of $50,000 doesn’t win you that amount automatically. The amount you can borrow with a personal loan depends on your credit score, your debt-to-income ratio and the purpose for the debt. Lenders evaluate how much you’re most likely to pay off, not what you need. Of course, those with higher credit scores will get better rates, but even those with fair, poor and bad credit can qualify for personal loans should their DTI and borrowing purpose warrant it.

Since 2012, lenders have been assertive about asking the purpose of the loan. Unlike with a quick cash advance, lenders are more generous when the purpose may strengthen the borrower’s financial health. A remodel or debt consolidation put a twinkle in lenders’ eyes.  Lenders actually consider some purposes frivolous these days. They’ve been known to turn down vacations, hot tubs, and other non-essentials, particularly if DTI is high. In the end, however, most consider the purpose of the personal loan an “influencing” factor rather than a primary one.

The debt-to-income ratio measures the amount going to debt service every month compared to the income coming in. A good debt-to-income ratio is 35 percent or below. At just eight points higher—43 percent—most lenders will not approve a borrower for a loan. Debt includes personal loans, student loans, car loans, mortgages and credit card bills. Your cable bill, rent, and car insurance do not figure into this debt calculation. Calculate your debt to income ratio and know your credit score so you can understand whether your loan amount offers are the best you can get.

A+ Rated First Financial Specializes in Low-Credit-Score Personal Loans

You may be surprised to learn that different lenders like to specialize in niche loans and borrowers. Some go for very short-term loans with high amounts. Others want to write only loans for borrowers with excellent credit. They create loan “products” that work well for the needs of that audience and don’t want to spend the time and money finding clients in other niches.

Rated A+ by the Better Business Bureau, First Financial has developed a specialty in serving those with fair, poor and bad credit scores—also known as “subprime” borrowers. We get you the money you need, all in the comfort of your home. You will know whether you qualify in five minutes or less with NO IMPACT to your credit. Apply today!

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7 Tough Financial Situations a Small Personal Loan Can Solve

woman sad at need for personal loan

The small personal loan has gotten many out of difficult situations.

blankDid you know the personal loan has interest rates 5 to 10 points lower than a credit card? Read these situations where a small personal loan makes more sense than additional credit card debt.

Finance a Funeral with a Small Personal Loan

 Unfortunately, death is a fact of life and often strikes at the most unexpected times. Not only is it hard to go through the emotional trauma of losing someone close to you, but making the funeral arrangements in just a few short days, while also figuring out how you’re going to pay for them is extremely rough. Funerals aren’t cheap, even with relatively affordable caskets the cost can still easily run up to the thousands. If the deceased person’s assets cannot cover the expense of the funeral service, taking out a small loan with a low interest rate is one of the best routes you can take to cover the cost and work your way towards paying it off. 

A Small Personal Loan Consolidates your Debt

Most people who receive a small personal loan get one to consolidate their debt. Consolidating your debt allows you to combine multiple types of debt, such as car loans or debt accumulated from credit cards, into one total loan with a fixed interest rate, consistent monthly payment, and a closed-end term. Doing this can have multiple advantages. It can lower the interest rate on the debt, and you may also qualify to have a lower monthly payment that is paid off over a longer period. Either way, consumers with multiple outstanding debts should definitely explore consolidation.

hand of man calculating costs of small personal loan

Escape Credit Card Debt

Another effective use of a small personal loan is to use it to pay off credit card debt. Of course, this may sound counterproductive, taking out a loan and possibly going into debt again just to pay off existing debt. However, many loans are available at a low rate, which limits the amount of interest you will have to pay, along with along with an end date to help you plan out your financial future. According to Ryan Bailey, who is in charge of consumer deposits, payments, and non-real estate lending at a TD Bank branch, who says that “With an unsecured loan, you pay it off in 5 years, generally at a much lower interest rate, so it saves payment, and you actually get it paid off.”

Paying off HealthCare Bills

 Life is unpredictable and sometimes you or a loved one may end up in the Hospital. Even with health insurance, costs can often be extremely high, especially for long stays. That is why so many people take out personal loans to cover unexpected health care costs. Don’t wait to do this – credit reporting agencies may be notified of missed payments and this will damage your credit score. A personal loan can allow you to pay off your medical expenses while keeping your credit score intact.

 Make a Big, Critical Purchase

Did your old car suddenly break down and you need to buy a new one but don’t have enough money saved? Or can you afford one, but don’t qualify for a secured loan because of your credit history? A personal loan could very well be the answer. People who qualify for personal loans are more than free to put them towards a big purchase, such as buying a car, motorcycle, a small house or a boat.

Pay for a Wedding with a Small Personal Loan

Your wedding day will be one of the most unforgettable moments of your life, and it is totally reasonable that you may want to spare no expense. You already know the cost is going to add up quickly. Between the reception, the dress and tuxedo, to hosting possibly over a hundred guests, weddings are very expensive. This does not even include the cost of the rings as well as a possible honeymoon afterwards. Many couples look to personal loans to help them finance their big day. They can be used towards the expenses previously mentioned, and can ensure your wedding day will be one of the highlights of your life.

Finance Unplanned Expenses with a First Financial Personal Loan

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As you’ve gathered from reading this article, personal loans have many practical uses and cover a wide variety of expenses. First Financial knows how unpredictable life can be and how hard it is to keep a large sum of money sitting idle just waiting for something to happen. That’s why our loans cover more than just mentioned above. A small personal loan can also help you finance veterinary care for your pet. Or say a loved one in a different country has suddenly fallen very ill and you have to find a way to be there with them. Whatever it is, rest assured that our loans are consumer friendly with low interest rates and set end dates. In a perfect world, money shouldn’t decide if your pet can get a surgery to extend its life or if you can visit a sick relative, and with a loan from First Financial, it doesn’t have to.

Escape Credit Card Debt: Debt Settlement or a Personal Loan?

Cutting credit card to get personal loan

blankMany consumers have received phone calls explaining that they can settle their credit card debt for a fraction of its total. While this is possible, taking the debt settlement route can have negative consequences on your long-term financial health.

Debt settlement works this way:  a company acts as an intermediary, making calls to your credit card company or another creditor for you.

The personal loan, on the other hand, is simply a lump sum of money you win from a bank or alternative lender after filling out an application form and submitting some financial documentation.

But to further guide you in deciding which path to take, here are the risks and rewards of debt settlement versus the personal loan.

Risks of Debt Settlement

Debt settlement comes with the following potential risks.

  1. Credit Damage.

A debt settlement company negotiates with your creditor to demand less money that what you actually owe. Your creditor, in turn reports this event to the credit bureau, explaining in detail that your debt was settled for less than how much was owed. Credit bureaus degrade your credit score.  Further, seeing this history future car, home and bank lenders will be reluctant to do business with you.

  1. Implications on taxes.

The money you escaped paying isn’t the free pass debt settlement companies imply. The IRS will demand a slice of this “discount” in your taxes. You will pay taxes on it as if it is income. Your debt settlement company sends information to the IRS and to you. In fact, if you do choose to use a debt settlement company, make sure to ask up from what the tax implications are.

 

Rewards of Debt Settlement

Debt settlement does help consumers reduce their debt. Also, when you try of applying for a loan when you still have not fixed your debt yet, you are certainly going to have a hard time. As a matter of fact, lenders are highly unlikely to be willing to work with you if this is the case. But when you do eliminate your debt, you will be attracting more lenders to work with you and even open up a lot of other opportunities for your own success.

  1. Save more money.

Giving your lender a lesser amount of the amount owed leaves more money for you to use to buy a car, home or other asset. Make sure you maximize the amount forgiven you will only be successful in this when you have already mastered the labyrinth of debt settlement.

  1. Put an end to the collection.

Aggressive creditors can make your life a nightmare. Even more frightening, when you do not respond, they file a lawsuit which could be served in public and end up garnishing your wages. Debt settlement puts this interference to a stop.

 

Risks of Personal Loan

  1. High interest rates.

Many are surprised that personal loan rates are typically sometimes twice as high or higher than home and auto loan rates. The better your credit score, the lower rate you will get. Still, those with personal loans pay a lot of end their creditors calls.

  1. Penalties for early payoff.

Some lenders charge high penalties if you pay the loan off early. Make sure to read the terms and regulations of the contract or ask your loan officer. First Financial personal loans never have penalties for early pay off.

  1. Complications that are unnecessary.

A personal loan should be simple:  you apply for a personal loan, the company pays for your debt, and in turn, you will be going to pay the company. View additional fees or meeting with bankers with suspicion.

Rewards of Personal Loan

  1. Improved credit score

The thing about having a personal loan is that it can pay off your credit card debt in no time. The credit bureaus also see this move as a commitment to pay the debt rather than escape it by going into debt settlement. This move reveals your habits of paying your debts and impresses lenders.

  1. No risked property.

A personal loan does not require property for collateral. Therefore, if you do default on it, you aren’t at risk for foreclosure or repossession.

A+ Rated First Financial Personal Loans for Borrowers of All Types, Even Bad Credit

When considering personal loans, don’t forget that online lenders have the automation and reduced overhead to offer the best loans and terms. First Financial is the national leader in providing personal loans for borrowers of all types, even bad credit borrowers. Just fill out our simple application form, and get the money in your account in a matter of days. The Better Business Bureau rates First Financial A+ because we make customer service our highest priority.

 

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