The move to apply for a bank loan to pay off your debt can be helpful or hurtful. Although it tends to work faster and at a lower rate, it all depends on your financial status. However, you are only eligible for a low interest rate if your credit score is healthy.
With extra money available, you can choose to pay off the debt and reap the psychological benefits of being off debt and having measurable financial advantages. Though the loan companies’ selling point is their reduced interest rates, note that there is minimal rate improvement if you want to pay off your debt.
Mainly, the interest rate depends on the credit and loan length; your credit benefit might end up being a more significant draw. So, before settling on any decision, you need to plan or strategize on how to pay off the debt. It would help if you understood the interest rates, pros, cons, and future consequences of the debt consolidation choice you make.
Get to know if the payment is feasible, or else you end up struggling to repay and start relying on the latest balance-free credit cards. Note that it’s a big deal to be transparent and truthful with yourself regarding your financial savvy and willpower; if you lie to yourself, it leads you to more disappointments and more debt. Choose wisely!
Is it better to pay off debt or pay down debt?
You can do either, but depending on your financial status and the type of debts you are dealing with. Debt payments have never been an easy task, particularly if you have to squeeze your expenses to have some extra cash to pay part of your debt. There are two distinct methods to help you settle your outstanding balances to get you clear and free: Pay off debt or pay down debt.
Though both strategies get you off debts, one method could be straightforward to stick to and create a significant impact on your finances. Every method will need one to have a list of their debts and deposit minimum payments; however, one method calls for extra payments to wipe the debt out.
Paying off debt is a strategy used to settle immense debts; it’s an excellent option that saves money and time needed to settle the balances. However, it has its cons. It would help if you were disciplined to let go of a tremendous amount of money to pay off a particular enormous debt without making minimum payments. Suppose you get demotivated and skip your strategic repayments; this method will not be effective.
On the other hand, in a situation whereby an individual’s income is unstable or irregular, or maybe a layoff is impending, paying down the debt is the way to go. Here, you stick to making minimum payments by starting with the smallest debt in ascending order.
For the pay off debt approach, you pay a constant amount from your discretionary income, and any emergency or bump-up in your daily expense might throw a crimp to your repayment plan.
With that said, if you are looking forward to tackling the debts, choose an approach that suits your personality and situation, a method that you will stick on all through your repayment period.
Those who require more incentives to settle debt should stick to paying down debt, while those who are devoted to interest payment and not denting principal might prefer paying off debt.
What is the smartest way to consolidate debt?
Debt consolidation is a great way to improve your finances. Though it instills fear in you, it opens up multiple opportunities and helps you tackle debts. It’s a perfect choice for debt reduction. If you have this in mind, look for the best option with the smallest-cost approach to be of debt.
Balance transfer card
It is a great approach that allows one to move all the debts from the current credit card to a newer one. The best part is that it charges zero interest for a promotional period of 12 to 18 months.
A balance transfer card is an excellent option for individuals with small outstanding balances who require little interest payment respite to catch up. Your credit score should look great in the loan companies’ eyes to qualify for one. However, it would help if you were well disciplined to pay the balance before the introductory interest rate expires.
One takes a new mortgage loan that is more than the debt you owe them currently, also referred to as home equity. Here, lenders research your financial and credit history to know if you are eligible for cash-out to refinance.
In this case, the new mortgage will pay off the old loan, and you get the balance in the form of cash that helps you pay your debts. Suppose you intend to refinance the mortgage, then this option is worthwhile to add more proceeds to your credit card debt.
If you have a retirement account plan at work, you could borrow it to settle your debts. You are allowed to ask for a portion of the money to help you repay any outstanding balances.
Though borrowing a loan from an employer-sponsored retirement account might significantly dent your retirement, you can get half the money or $50,000 – depending on the amount that is less. After which you pay it within five years. You can make the payments at least quarterly. But you should only consider this method after ruling out the balance transfer method and other debt consolidation methods.
Peer-to-peer loans are another option for paying off debts. It connects borrowers to lenders directly without involving the middleman. Borrowers visit the lending website, fill an application, and risk is assigned based on their financial profile. Then, the investors give their interest rates and loan terms for the borrower to either reject or accept. Suppose they agree to the terms and conditions and release the money via the site. They tackle the whole process online.
Will my credit score go up if I settle a debt?
It will, but not right away. The lenders base your credit score on various factors; for instance, the information is given on the credit report, whether you have settled part of the debt or fully settled the outstanding balance.
So, if you don’t fully pay the balance, the impact on your credit score will turn out negative. But once you drop all the debts, rebuilding it will be up to you. For example, you should use your credit card responsibly, pay bills on time, and reconstruct your credit history.
Frequently Asked Questions
Do personal loans hurt your credit?
Personal loans can hurt or help your credit score. It all depends on how diligent an individual is when repaying the loans. Though eliminating or reducing your debt improves your credit health, debt consolidation is not a strategic way to increase the score.
Is debt relief a good option?
It will depend on your financial situation. Debt relief makes your payments manageable after debt renegotiations and replacements. Either they lower the rates, extended repayment term, waived fees, or reduced outstanding balance that helps you to avoid bankruptcy.
However, it would be best to keep in mind the potential risks and benefits before settling on a debt relief solution. Debt settlement negatively impacts the credit score for close to seven years since you need to put pressure on your creditors for them to accept the settlement offer. During the negotiation period, you tend to stop paying the bills for months waiting for their acceptance.
What is the downside of debt consolidation?
The most significant benefit that people reap from debt consolidation is the many small payments, different due dates, loan terms, and interest rate that you can roll into one loan with one speed, one term, and one payment date. However, it has a considerable risk connected to it. Debt consolidation damages the credit score and can have high rates, fees, and high possibilities to lose any collateral that you put up.
Will credit card companies forgive the debt?
Yes, but you must give a practical reason. However, that doesn’t cure your financial issues. You can never pay something with anything, not when it comes to debts. Debt forgiveness comes with a cost; the lenders will not let all the money sink.
Complete debt forgiveness is mostly non-existence; it calls for extreme measures like bankruptcy for them to erase it. Otherwise, you must repay a portion of the debt for the creditors to forgive the other part of the balance. Remember, your credit is penalized for that.
For those wondering what approach to tackle their debts, this guide is good enough to help you select the best method that suits your needs. Credit card negotiations can be overwhelming, but avoiding the issue makes it even worse. The truth remains, there are multiple options to lower your debts, whether you opt to negotiate the payoff yourself or get a financial expert. While at it, make sure to weigh your options and come prepared to face the credit card company.