Credit cards, car finance, hire purchase agreements and loans can prove unmanageable. Rather than struggling to meet lots of different credit commitments, consolidate your debt with a loan or a debt solution. Selecting the appropriate option will lead to greatly improved money management and affordability.
Your credit history will have a huge bearing on how you should consolidate your credit card debt and loans. Borrowing money with bad credit is more expensive due to the risk of default, but a debt relief program can help you to pay off your debt without the accrual of any further interest and charges.
Consolidate Your Debt with an Unsecured or Secured Debt Consolidation Loan
A loan for debt consolidation allows a tenant or homeowner to put all personal debt together and make a single monthly repayment. The term of the loan can be shortened or extended to improve affordability or to pay off your debt more quickly.
Lenders have tightened their eligibility criteria in recent years and interest rates have risen on best buy loans. Most people choose a debt consolidation loan, rather than a debt free solution, because they have a good credit history and stand to save money over the duration of the loan.
The best loan rates will only be offered to low risk customers who will pay their debts punctually. Any defaults and delinquent accounts will show on your personal credit report for a period of 7 years. In the case of chapter 7 bankruptcy, they display for up to 10 years.
If a history of poor credit is a problem, an unsecured debt consolidation loan is probably a bad option as the cost of borrowing will be too high. There isn't much point in a loan to consolidate your debt if the rate of interest is higher than it is on the bulk of the credit that is being consolidated.
In order to reduce the cost of borrowing, homeowners use the equity in their home to secure the loan. The provision of collateral means that you can consolidate your credit card debt more affordably. The danger is that default will lead to foreclosure so think carefully before turning unsecured into secured debt.
Consolidate Your Credit Card Debt and Loans with a Debt Management Plan
A debt management plan involves defaulting on the terms and conditions of your credit agreements. Rather than paying the amount specified, the client makes an affordable monthly payment until the debt is completely cleared. Repayments are lower, but it takes longer to clear the debt.
Although there is no reduction to the principal, creditors may be prepared to freeze further interest and charges. They are under no obligation to do so as, unlike filing bankruptcy, it isn't a legally binding debt solution. It's a purely voluntary agreement between a debtor and his creditors.
This debt free plan is normally managed by an intermediary in return for a 15% management fee. Payment should be collected from each monthly payment and not taken upfront. Avoid debt management plans where the provider seeks to front-load its charges.
Pay Off Your Debt with a Debt Settlement Program
A debt settlement program is normally considered to be the leading alternative to bankruptcy. It may be possible to reduce the principal by up to 50%. The remaining sum will be repaid over a 12, 24 or 36 month period. The debt write-off doesn't take place until the final payment has been made.
The fee structure is very similar to a debt management plan and it is also a voluntary agreement. It's an effective way of paying off your debts when the amount owed is higher. The best debt reduction results are normally achieved when a professional handles the negotiation process with creditors.
Canceled debt is treated as a form of taxable income by the Internal Revenue Service (IRS). Although the amount owed will be a lot less, it will still lead to a sizable tax bill. Before you consolidate your debt and credit, money will need to be set aside to meet your tax obligations. This is the case unless it can be shown that you were insolvent (assets worth less than your debts) at the time the debt was eliminated.
Sources
"Cancelled debt - is it taxable or not?" Internal Revenue Service (IRS).
"Debt management plan fact sheet." National Debt line.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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