DEBT CONSOLIDATION: IS IT GOOD FOR YOU?

Having debts can be very stressful. It is more stressful if you have difficulty paying up. This calls for solutions. Debt consolidation is a solution on the list. Considered it a life saver, it’ll be useful for you if you understand what it involves.

Debt consolidation is getting a loan to be able to pay up and clear the other debts you may have, then pay off the debt. It involves approaching a new lender and getting new terms that involve a different interest rate. Debt consolidation, in turn, allows you to get money from one source (lender) to settle all different debts and credits that you may have.

Common major problems solved by taking up debt consolidation

Debt consolidation literally may help you in getting out of debt. The following are things to avoid:

  1. High-interest rates

Debt consolidation helps in getting out of debt

Debt consolidation helps in getting out of debt

Chances are that the actual debts you have command high-interest rates. This translates into a large amount of money ending up into your creditor’s pockets at the end of the day. You may even discover that your debt is growing as you continue repaying. A debt consolidation becomes the perfect way out. Debt consolidation gives you the ability to get out of the debt problem so that you not only settle your debt, but also get a new consolidation loan with a lower interest rate.

  1. Higher monthly payments

When you have many different debts, debt consolidation becomes a lifeline. With the use of a debt consolidation plan, you get the chance to combine different debts into one consolidated debt. This means there’s just one debt and one repayment amount to manage. The consolidation plan with a lower interest rate leaves you with less to pay, thus your monthly repayment amount is reduced.

  1. Bill confusion

Debt consolidation gives you the chance to be focused on only one debt repayment. For example, if you have so many debts and different repayment plans to service each month, should you forget to pay up or pay late, you will have to pay a lot more in the end. With debt consolidation, you just need to think of how to pay that one repayment amount by the end of the month and not worry about paying late or missing payments.

Types of debt consolidation plans

debt consolidation plans

debt consolidation plans

Debt consolidation is just a generic term to describe a lot of such options out there. It is important to have a lot of options to choose from as each one has its own characteristics. It’s all about you choosing what fits your financial situation and your ability to settle the debts.

  • Debt consolidation companies

Debt consolidation companies have been established to help people get out of debts. The use of a debt consolidation company involves getting a consolidation loan with a new interest rate from them. They give you the loan, you settle your debts and then focus on repaying them as per the agreement put in place. This is a great way to get out of debt. However, there is a catch with this option. You have to be very careful with the calculations that are involved here.

Debt consolidation and the rest of the other options available all depend on your ability to settle your debts, your source of income and how much of it goes into settling the debt. If you miscalculate, then you are in trouble. The interest rate could be set in a place where you realize you haven’t solved anything and in turn it is still hard to keep your head above the water. If you are not careful, debt consolidation may cost you your credit score and get you into trouble in the future.

To make sure all the above don’t happen, consider the time it will take to repay the debt. This will help you determine if, with the combination of the interest rate, debt consolidation will solve your problem. You must also be careful with making punctual repayments. Otherwise, you be forced to pay more than you had expected.

  • Home equity loans    

 Home equity loans

Home equity loans

This plan allows you to use the value of your home to get a loan. This program allows you to get between 75%-80% of the value of the home to help you pay up the debts that you may have. This time, the home is used as a collateral. A home equity loan has fixed terms, that means that the loan amount and interest rate are fixed. The time frame for payment is also fixed.

However, there is a catch. It’s your house which you have used as collateral for the loan. You have to consider carefully before you go down that road, making sure that the debt is worth putting your home on the line.

  • Balance transfer        

You probably have seen the “0% interest” adverts on debt consolidation loans. This is a plan that allows you to get the amount of money needed to settle your debt at a 0% interest rate for a period of time. First, you need to pay between 2%- 5% of the total loan amount. Then, for the next period of time that you are paying 0% interest, you must pay back the installment in full and on time. This period is between 6 months and a year. If you are late or skip a payment, your interest plan is cancelled and you will be charged interest from then onwards. It is also important to check the interest rate charged before you make the decision on taking up a balance transfer.

  • Peer-to-peer lending        

Peer-to-peer lending

Peer-to-peer lending

Peer-to-peer is a plan that allows lending companies to connect you with other lenders. They get you the loan and you pay back slowly with an interest. It is a win-win for both parties as the lender gets steady returns while the borrower gets the money to settle his debts. The loan has a time frame of 3-5 years, giving you enough time to pay up.

Is debt consolidation

Debt consolidation is a great financial decision to make. It gives you the opportunity to shape up financially. It also allows you to concentrate on just one consolidation loan and one repayment amount.

It is important for you to sign up for a financial plan which you can comfortably afford. It’s all good decision making and not getting into more debt after paying off your debt consolidation loan.

 

HOW CAN PAYDAY LOANS BE IMPROVED?

In this day and age most people live paycheck to paycheck and have to become pretty creative when it comes to stretching their incomes and saving for emergencies and retirement.  For some people payday loans are as necessary as public assistance is to the poor in order to make it through each pay cycle and they have no other alternative to keep their heads above their needs and finances.

While payday loans do have their benefits for those who depend on them they also have their disadvantages for those same people.  Payday loans often have high-interest rates, high fees, lender favored contracts, and sketchy collection practices.  All of the disadvantages have the potential for improvement.  

The first area for potential improvement is the interest rates that are charged.

The first area for potential improvement is the interest rates that are charged.

The first area for potential improvement is the interest rates that are charged.  The interest rates charged by payday lenders are often pretty high.  In fact, in some instances they are as high as 400%.

If payday lenders were to lower their rates to where they were only slightly higher than those of banks it would not only benefit their consumers but it would also benefit them by attracting a more diverse group of borrowers.

A reduction in interest rates would affect the profits received by lenders but at the same time it would open new doors for the lenders by widening their potential customer base.

When a potential borrower does an internet search for payday lenders more negative information is available than positive, which is a deterrent for most people needing to borrow money.  However, if the financial terms were updated and changed to be more borrower friendly there is likelihood that more potential borrowers would consider a payday loan more often than just as their last option.

Fees associated with payday loan

Fees associated with payday loan

The second area for potential improvement is the fees associated with taking out a payday loan.  If lenders were to have set loan fees it would better enable customers to determine the cost for them to borrow money and could help them in their selection of a financial institution.

Potential borrowers that are on the fence about payday loans are naturally going to be more skeptical and conservative in their decisions regarding lenders than established borrowers.

Although it is nice for lenders to have return customers at some point these customers are going to have a change in circumstance that either eliminates the need for a payday loan or the borrower’s eligibility for a payday loan.  Therefore, an essential part of a lender staying in business is to bring in new borrowers.  One way that this can be done is by creating a customer loyalty program.

Many lenders already have a referral program in which established customers can receive a discount or free transaction when a new customer is referred and takes out a new loan.  In order to take this program one notch higher lenders could reduce fees and interest rates for loyal customers who have a good payment history with them.

Traditional lending institutions have had these types of incentives in place for years so it’s time that payday lenders educate themselves to the tactics and techniques of traditional lenders and utilize some of the same measures they use to draw in new borrowers.

lender favored contracts.

lender favored contracts.

The third area for potential improvement is lender favored contracts. Payday loan contracts almost always favor the lenders.  The repayment terms for payday loans are often predetermined and pre-set by the lenders with very little input from the borrowers.  Most if not all payday lenders have a one size fit all type of contract meaning that they use the same contract for every customer.

Regardless of whether or not the customer is a new or return customer or the customer’s payment history payday loan contracts don’t vary between good and bad customers. In relation to contracts are the collateral practices of lenders.

The majority of lenders require borrowers to present the lender with either a post-dated check or bank account information in which payment is withdrawn from the borrower’s account on a date chosen by the lender.  Improvements can be made in this area as well by possibly allowing borrowers to choose their own repayment dates or giving borrowers a grace period to repay their loans prior to drafting the borrower’s accounts.  Another possibility would be to allow borrowers to use another form of collateral such as a title, some type of electronic, jewelry, etc.

The fourth area is collection practices.

The fourth area is collection practices.

The fourth area for potential improvement is collection practices. Many lenders are not clear about their collection practices prior to borrowers signing their loan agreements so they are confused when lenders begin collection procedures.

It’s not uncommon for some payday lenders to use tactics such as calling borrowers employers and family members and threatening to have defaulted borrowers arrested.

Although these tactics are not used by all lenders they’re not unheard of. An improvement can be made in this area by making borrowers aware of collection practices prior to signing the contract.

Payday lenders are hero’s to a lot of people who are faced with financial crisis. Although these services are helpful to a lot of people there is a great deal of room for improvements.

Any and all improvements could be beneficial to lenders and borrowers. If payday lenders would consider reevaluating their practices they would be more widely accepted, looked at more favorably, and would make them more competitive with other lending institutions.