Is debt consolidation right for you? To help you decide, here is some useful information and guidance on the common types of debt consolidation, their pros and cons and how to identify a reputable debt consolidation provider.
The Main Types of Debt Consolidation
The two main types of debt consolidation are a debt consolidation loan and a 0% balance transfer credit card. Both have their advantages and disadvantages, but if used correctly they can help you manage debt repayment more effectively.
Debt Consolidation Loan
A debt consolidation loan involves consolidating multiple outstanding debts into one single loan. This means just one easy to manage repayment is required every month.
- If you pay back your loan over a longer period of time you may be able to significantly lower your monthly repayments.
- Providing you have a good credit rating, you might be able to secure a debt consolidation loan with a competitive APR and reduce your overall repayment sum.
- You will be dealing with one loan provider and will be paying back one loan repayment each month, making it far easier to manage repayments. You will also have a clear full repayment date set as a target to work toward.
- While paying back your loan over a longer period of time may reduce your monthly repayments, your overall loan repayment may be higher due to interest and it will take longer to become debt free.
- Debt consolidation loans require discipline. A set amount must be repaid every month, no matter what your earnings that month. If your income is unstable you may find it difficult to meet repayments and incur penalties.
- Debt consolidation loans can give you short term respite, but may not change the bad borrowing habits that led you into trouble in the first place.
0% Balance Transfer Credit Card
A 0% balance transfer credit card enables you to transfer your existing credit card debts on to a new credit card and enjoy an interest free repayment period for a set number of months.
- You will be able to repay a sum of the existing credit card debt without any interest being added for the stated number of months.
- Unlike a debt consolidation loan, there will only be a minimum amount to repay each month rather than a rigid set amount, this gives you greater repayment flexibility.
- The interest free period can help you organise a strict personal repayment budget that can clear a significant amount of your existing credit card debt within a relatively short period of time.
- Many 0% balance transfer credit cards charge a small percentage of the existing debt to make the transfer in the first place so thoroughly check the small print.
- Having only a minimum monthly repayment to be made can lead to more spending and less debt clearance if you are ill disciplined. This can result in serious financial difficulties when the 0% interest period is over.
- While the 0% interest free balance period is useful for those dedicated to repaying their credit debt off, once it finishes the card will most likely revert to a standard interest APR of around 17%, causing you to plunge into deeper debt.
Identifying a Trustworthy Debt Consolidation Provider
Before signing anything it is wise to consult an independent financial advisor regarding your debt consolidation options and which debt consolidation providers or 0% balance transfer credit cards can help you manage your debt repayments more effectively.
Debt consolidation is a big step to take and requires a lot of consideration before entering into an agreement with a provider. Conduct online research, seek advice and discuss it in depth with your partner or spouse. There are some excellent sites out there that provide advice regarding debt consolidation, for example Money Expert.
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