Debt Consolidation – Choosing the Best Option According to Your Credit Score

debt-consolidation |

It’s all about paying off the debts. But, what if you have a bad credit score to deal with? Is your credit status moving slowly towards bankruptcy? Whatever may the situation be, clearing out the debts is mandatory for a healthy and worry-free financial life.

What happens in debt consolidation?

This is a great idea to repay the debts as much as possible and manage your finances. Once you opt for a debt consolidation loan, a lender will issue you a single personal loan at a low interest rate to repay and clear other debts you had accumulated earlier. Your debt may range from medical bills to credit card balances. You need to pay a fixed amount as monthly installment to the lender for a certain period to repay this new loan amount. The term for consolidation amount repayment is usually 2-5 years. However, it all depends upon the individual credit profiles that define the interest rate you receive.

Most importantly; the interest rate never alters during the life period of the loan. This consolidation strategy is quite a great option for those who find it difficult to keep up with multiple payments.

You may think that taking a loan on a personal basis is the only way to get things streamlined and stabilize your financial status. But, it is actually not so. At times, it can be an expensive option to consider. The consolidation options related to debt repayments are always better, but you need to focus on the terms and conditions as well as the fee structure being charged by the lender. You must consider the type of support it offers like, payment terms flexibility, financial education, etc. and also whether there are options to use a co-signer to receive lower interest rate.

Which is better: a loan or a credit card for consolidating the debt?

If you have a good or positive credit score, applying for the 0% interest-based credit cards can be an option to consider. This idea allows you to save a good amount of money on interest rate, provided you can repay the debt within the promotional period.

However, there are some great advantages offered by personal loans too. The biggest advantage that comes with a personal loan is that it puts enormous pressure on you to repay the debt back within a certain time-range. It is always a blessing in disguise which many fail to understand. If you are confident enough to pay off the low-rate card before the actual teaser rate expires, it is the best option to consider.

Opting for personal loan

There are several advantages associated with personal loan options. With personal loan, your credit score may improve. It allows you to move your credit-card debt over to the installment loan column. Credit scores are figured in a certain calculative way, which allows the borrowers to get hit by a significant penalty amount. It all depends on how the available credits are used.

When you opt for a debt consolidation loan, personal loans are best to receive lower interest rate. Also, it facilitates repaying back the debt faster. Otherwise, applying for a new loan to wipe out the old one can prove to be fatal.

Personal loans usually come with the fees of 1 – 6 percent. This is described as origination fee.  You can either go for consolidation or can tackle your existing debts in a systematic way. Finally, the best rates for personal loans will only be applicable for those with impeccable credit. If your credit score is poor or you have a very limited credit history, your interest rates will definitely be on the higher side.