With some interest rates at their lowest in decades, many people have decided to take on extra debt in order to help with financial difficulty. Many see the low interest rates as a chance to consolidate all their other high-interest balances into one easier and cheaper package. However, although some consolidation packages may seem like a viable alternative, make sure you’re looking at all the options of debt consolidation instead of choosing the deal with the most symbolic relief.
Balance transfers, home equity and zero per-cent credit cards are just a few forms of debt consolidation loans. But don’t get sucked into combining all your balances until you’ve totalled your existing debt – many creditors will refuse debt consolidation packages and ultimately low interest repayments to people with already excessive debt.
Debt consolidation, however risky, can be beneficial if you choose the right package. Here’s some of the schemes explained:
Home Equity Loan
Advertised as a quick and easy way to get on top of your finances, home equity loans let you borrow money against the value of your home. By releasing this cash tied up in your home, you’ll be able to pay off other bills and outstanding credit. However, if you miss any repayments on your home equity loan, you could lose your property.
Home equity loans also make you eligible for tax breaks, however make sure you calculate whether this type of loan will work out cheaper or more expensive in the long run – just because a loan is tax deductible, it doesn’t mean it makes financial sense!
An Individual Voluntary Arrangement (IVA) allows you to pay creditors reduced payments while still protecting your assets from being repossessed, and other legal action such as bankruptcy. This type of loan is one of the most popular debt consolidation responses, as it allows a person more flexibility with their finances while also letting them repay debts at a reduced rate.
Zero Per-cent Credit Card
Although these types of low-interest loans appear to be a good solution to debt, zero credit is short lived and interest will rocket if you don’t transfer the remaining balance before the deal is over. Furthermore, if you miss any payments, the creditors will raise the interest anyway, not to mention late penalty fees and hidden charges. In order for these cards to work, make sure you pay way over the minimum amount on your remaining balance every month.
Debt Consolidation Loan
These types of loans are very convenient, as you pay one loan consisting of all your debts instead of paying all your creditors separately. However, although you’re only paying one bill each month, it doesn’t mean you’re saving money. In some cases, you’ll be paying more interest on a consolidation loan than separately paying all your debts.
Before you take out one of these loans, make sure you’re actually going to come out better off, instead of just looking better off. If you’ve got excessive debt, then you won’t have access to the lowest interest rates, thus you’ll certainly be paying more. Calculate the interest you’re paying already with all your individual loans, and compare it with what the consolidation loan is offering you.