Pros and Cons of Your Debt Consolidation Options No ratings yet.

We shall start up with understanding what is DEBT CONSOLIDATION –In simple terms it means to get a single loan to pay all of your smaller loans. The ideology behind debt consolidation is that making one payment every month seems easier to manage & the new loan may result in lower interest rate, lower monthly payment or a combination of both.

Debt consolidation loans are of 2 types:

Secured loans:

Under secured debt consolidation loan borrower can avail the loan amount depending upon the value of collateral pledged against the loan. Secured debt consolidation loan can be availed by anyone who agrees to place some valuable collateral i.e. regardless of their credit history borrower with good or bad can apply for secured debt consolidation loans.

Unsecured Loans:

In unsecured loans, the asset is not required as collateral. If the borrower fails to pay the money of the loan, the lender can eventually obtain a court order in an attempt to recover the money. The added risk for lenders results in higher interest rates. Approval of such loans are primarily based on borrower’s credit score (in addition to income and total debt).

People pitch to debt consolidation by highlighting 3 salient features:

LOWER’S YOUR MONTHLY PAYMENT AMOUNT

By consolidating all the debts they might lower your monthly payment amount but the reality is by lowering the monthly payment it is likely to take longer time to clear the debt.

REDUCES YOUR INTEREST RATES

It might be possible that the new loan may be available at lower interest rate but it often ends up with higher total interest to be paid.

MANAGEABLE MONTHLY PAYMENTS

We get enticed by the idea that instead of multiple we only have to pay one amount each month. But there is lot more in picture which seems unseen.

So to decide whether Credit card Consolidation is a Good idea or not: One must work on planned budget & improve savings & spending habits.

A very famous financial author once quoted-“DEBT IS NOT A PROBLEM; IT IS THE SYMPTOM OF OVERSPENDING & UNDER SAVINGS”.

Get rid of pending debts and liabilities

Debt consolidation is one of the competent ways to get away with your current debts. As per this, all your debts are rearranged into one single loan where the interest rate is on a lower side. If you are striving hard to break out of debt, a consolidation loan will surely deliver you from this situation.

It can also be said that debt consolidation allude to a loan which is, particularly, taken to get rid of pending debts and liabilities. There will only be one single loan for which there will be a single monthly payment.

Related – 13 Carcinogenic Debt Consolidation Myths You Ought To Know In 2017

Pros of debt consolidation 

  • Getting rid of bill collectors – Collection agents can really unsettle your daily schedule, this is where enrolling for a debt consolidation loan can prove beneficial. This will put an end to all annoying calls & letters and you no longer have to deal with the collection agents.
  • Organizing bill payment – With the help of debt consolidation, you get to reorganize your repayment to varied creditors, thus making one single monthly payment. When you have one single bill to pay in a month, you have to care less about making minimal payments to different organizations. Moreover, you get to extricate yourself from remembering the due dates every single month. All you need is to pay a bill every single month and you no longer have to take care of the accruing late or missed payments.
  • Fixing the credit – If you are not able to cope up with the monthly payments of your credit card, there are strong probabilities that your credit rating is descending. While your credit report card may undergo a primary ding, all the negative records of missed payments instantly stops when you enroll yourself in a credit relief program.
  • The prime most advantage of debt consolidation is that all our debts are in one place, so we have only 1 interest rate to keep track of & one payment to make every month.
  • Debt consolidation aids in managing debts effortlessly because you have to make 1 monthly payment to your financial institution, rather than bunch of different payments to different lenders.
  • Using debt consolidation one can also close down other credit cards & loan accounts which will revamp their credit rating by showing lenders that your finances are managed properly.
  • Since the interest rate of the new loan is generally lower than the existing small loans, you will pay less of your money to interest, getting you out of debt faster.

Related – Private & Federal Student Loan Debt Consolidation and Settlement

As and when your consolidation agency receives timely monthly payments, they further update leading credit bureaus, thus helping your overall credit ratings to improve.

  • Constant Instructions – A reputed debt consolidation agency will not only provide you loan so that you can pay off your creditors, instead they should impart information that will help you to make you more responsible towards your finances in the coming times.

You should acquire knowledge of setting up a budget, set financial goals for the coming future and plan an emergency fund by taking guidance from a reputed credit card consolidation company.

Cons of Debt Consolidation 

  • Unjustified Fees – There are consolidation agencies which charge high fees and interest rates are also on a higher side. This will mean that you will use majority of the monthly installment to pay off the interest, thus making it difficult to pay off the debt. The interest rates can also rise unexpectedly, worsening the things for you.
  • Low Interest Rates – Majority of the people are of the view that the low rate of interest will help them to save more which is not correct. Usually the term for debt consolidation loans stretches for a longer duration, this will mean that your total interest payments will amass to pricey debt.

If you think that paying off short-term debts such as personal loans or credit cards over a longer duration, with a lower rate, will be a good idea, think again. In real terms, this actually means that you will have to pay more interest in the future

Related  – Which Are The Best Ways To Consolidate Your Student Loan Debt?

  • Additional debt – Some people have a wrong illusion that debt consolidation is a way through which they can get rid of the debt. Alas, majority of the consumers are of the view that the zero balance is actually a green signal for them to go extravagant while spending. But, all this will only end up making things worse.
  • Cutting down the debt – Debt consolidation replaces current debt with another debt which most of the people don’t realize, so this cannot be a solution for all those consumers who are over-indebted. There are certain things that you should follow for financial well-being – spend less, save money and pay your debts with your money.
  • One of the main disadvantages of debt consolidation is that one might end up paying more interest than you need to on some of your borrowing. Debt consolidation can make debts more expensive and may take longer to pay them off. One must remember when we consolidate debt we end up owing same amount of money but the difference being that the length of the term increases which indicates paying more money through interest.
  • Debt consolidation may reduce your monthly installment & give you short term breathing space but it will result in paying interest for longer tenure.
  • It’s a myth that debt consolidation reduces your debt rather it may lead to more debts by giving you an illusion that the debt is being paid off.
  • If you have used your house or any other valuable asset as collateral you can risk losing it if you are unable to pay the loan installments.
  • Therefore debt consolidation is not a solution for over indebted consumers. In order to get on track of financial well being one must spend less, save for emergencies & pay off their debt with their own money.
  • Next point to be taken into account is that how do you qualify for debt consolidation loan:
  • To see if you are eligible for consolidation loan the lender would examine your credit rating because lending institutions will use your credit score & payment history to determine risk. If borrower has bad credit history or large debts, the borrower may offer a secured loan.
  • The lending institutions also delve into the regular source of income of the borrower to analyze whether you will have enough cash to pay the loan installment after meeting your daily living needs.
  • Lending institutions may need a cosigner for the loan or provide collateral such as house or car, which borrower will pledge as security to ensure he pays back the loan.

Related  –  Credit Card Debt Negotiation – An Expert Guide

Should I choose debt consolidation

At the end of the day, it is your personal decision whether the debt consolidation is right for you or not, if yes than our credit card debt specialists are availaible to you for providing expert advice on how to pay off your credit card debt. Now that you have a fair knowledge of the pros and cons of debt consolidation, you can make decision on your own. All you need is to consider the above discussed information and you cannot go wrong.

Related  – What is Credit Counseling and How It Can Help You Reduce Debt Problems?

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Zombie Debt: Don’t Get Haunted, Chase Away The Collectors No ratings yet.

In the past, if you had debt and you were not able to pay it, there may be a possibility that those debts have been declared as ‘uncollectable’. In other words, it can be said that the company has stopped showing interest in collecting the debt and there can be two reasons responsible for it : the company didn’t show any interest in collecting it and secondly they had stopped bothering to get in touch with you.

However, of late, a new variety of debt collector has surfaced to purchase these old debts and they are leaving no stone unturned to collect them once again. The worst part is that you start receiving letters and phone calls asking you to make the payment for your debts. So, at this moment you should have all the information about the zombie debt and what you ought to do in order to deal with the collectors.

Related Post:  Credit Card Debt Management

What is ‘Zombie Debt’ ?

– In the situation where you are not able to pay the debt or you are not paying the debt deliberately the lender, on the other hand, can make you pay the debt using varied methods. These collectors can send you harassing letters, you can receive threatening phone calls or in the worst case even wage garnishment. There have instances in the past where the debtor has moved away or simply have no funds to pay the debt.

After a while, it can be a costly affair for the collector to continue making attempts for debt collection. The majority of the lenders don’t try collecting the debt after six years as it has already crossed the set limitations and you, as per the laws, you don’t have to pay the debt. However, even after so many years, these old debts enjoy some worth and if the old surety has stopped making efforts to get it paid, other companies take their place. These un-collectable debts are then sold, at a smaller amount, to other companies dealing in debt collection.

What is Zombie Debt? How To Get Rid Of Collectors [INFOGRAPHICS]

Even these zombie companies make a meager payment in order to have these debts, getting paid on even a small amount of the loans can prove profitable for such companies. As per an estimate, such companies pay around 3% of the face value of the loan. Let us say, in the case where the original debt is $1,000, the new creditor will make a payment of around $30. If the company can make even one person to repay $1,000 debt in full, it will end up covering the costs to over 30 identical loans.

Well most of the times, the debt is quite old and debtor have forgotten about it, and it may no longer be highlighted on your credit report. Or perhaps, the debtor has officially announced bankruptcy but didn’t remember to incorporate that debt in the bankruptcy plea. There is a fixed time period on how long a lender can try for the collection of the debt. While the debt remains valid after the set time period has passed, as per the law you are no longer required to make the payment for that debt.

Related Post:  Credit Card Debt Settlement Process

Time-Barred Debt Accounts for Debt Collection Activities

The most comprehensive data available about the age of debts being collected by debt buyers  comes from a  2013 FTC study of the debt-buying practices of some of the nation’s largest debt  buyers.

This study found that nearly 25 percent of debt acquired from the original creditor  and more than 60 percent of debt purchased from other debt buyers was over three years old at  the time of purchase.

More than 30 percent of the debt purchased from other debt buyers was  over six years old.

Chased By A Zombie Debt – Tips To Get Rid Of Debt Scavengers

 kill zombie debt infographic

In order to save yourself from paying a zombie debt, you need to be familiar with the below-discussed steps –

  • The debt collection company can be sent a certified letter asking them about the owning of the debt and asking them to prove it that you actually owe it.
  • In case you receive a letter, you should keep it with you.
  • You should not be talking for too long on the telephone. If in case you do get a call, you can ask them the address of the debt collection company and send them a letter.
  • Make sure that you avoid having a discussion with the collector till the time you have received a judgment against you. The Fair Debt Collection Practices Act states that the debt collection company should provide you all the details.
  • Make sure that you don’t accept that the debt is yours. There are strong odds that they can use this information against you.

When you have the details regarding the debt, you can decide on whether the time period, for paying the debt, has been crossed or whether it is your debt in real terms. At times, it can be because of some computer error, identity theft or some fraudulent method just to accumulate money from you.

Related Post:  Credit Card Debt Negotiation – An Expert Guide

When the last time an activity is being registered on the debt is actually the last date when the statute of limitations for the debt actually begins. Generally, it is the last payment that you need to make. Under the guidelines of FDCPA you, as a debtor, cannot be sued for the collection of debt if it is more than six years. There is a set limit i.e. 7 years and when it is passed, the credit card debt should be removed from the credit reports.

Another letter should be sent to the debt collection company if they keep on contacting repeatedly. Since, majority of the zombie debts are beyond the limitations of set time period, the debt collection company might not be able to go ahead with the legal action.

Old Debt, Statute of Limitations on Debt

Letter to Collection Agency to Stop a Zombie Debt which is outside of the statute of limitations

This sample letter describes the collection agency to stop because the debt is outside of the statute of limitations, plea a cease and desist under the FDCPA – Download pdf

About paying the debt –

Once the set time limit, for paying the debt, has been crossed there is no way you are going to be benefited by paying the debt. The majority of the debt collection companies/agencies inspire the debtors to pay their debts through guilt, inculcating fear, lack of knowledge. But, it in the case where the debt has crossed the statute of limitations, which can differ significantly by debt’s nature and state, you don’t have to pay anything.

At times, these agencies may guide that you can pay less debt as compared to what you actually owe . But on the other hand, this can have a negative impact. Unless they have offered a written offer-in-compromise, paying any amount will still make you liable for the debt. This also means that any amount that you pay will end up restarting the statute of limitations.

If you really think that you should pay off the debt then you have every right to go ahead and do so, at the same time you have to be certain as who is actually benefiting. The money is not going to get transferred to the original lender instead it will go to the debt collection company/agency.

Fair Debt Collections Practices Act –

There is Fair Debt Collections Practices Act (FDCPA) that offer protection from getting harassed when these agencies collect the debt. The act also lays strict rules against the debt collection practices. In addition to others, setting a statute of limitations while the collection of the old debts is one of the most important ones.

  • There is a provision in the law where the debt collectors are being refrained from passing on any lie regarding the debt or what can happen in the case when you don’t pay your debt.
  • The debt collectors are also being prohibited from sharing any information about the debt that is incorrect.
  • If the debt has been inactive for a minimum time period of six years, you cannot be sued for your debts. And the debt should also be removed from your credit report.

Sump Up

Make sure that you have verified the debt, this will surely save you from harassment. If the debt is too old, it is not mandatory to make the payment for the debt. Gain holistic information about statute of limitations in your area and see whether the debt is showing up on your credit report.

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