Debt consolidation offers a debtor an opportunity to pay off multiple creditors by consolidating them into one easy monthly payment.
Significance
Debtors with an unmanageable debt load can work with lenders to consolidate all of their debts into one combined payment with a lower interest rate.
Types
Debt consolidation options include balance transfers, home-equity loans and lines of credit, second mortgages, personal loans, loans from 401(k) plans, credit counseling services, social lending, and Chapter 13 bankruptcy.
Benefits
Balance transfers offer attractive introductory rates. Home-equity loans have low interest rates. Credit counseling services negotiate with creditors and make payments. Small banks are more willing to work with debtors than larger institutions. Social-lending clubs offer fixed terms and easy payoff dates.
Disadvantages
Balance transfer introductory rates apply only for a short time before a higher interest rate kicks in. Home-equity loans put a person's home at risk in case of default. Chapter 13 bankruptcy negatively affects a person's credit. 401(k) loans have penalties for premature withdrawals and are due immediately if a person loses his job.
Considerations
Debt consolidation doesn't always work unless a person stops acquiring more debt.
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