No one sets out with the goal of accruing debt that they can’t pay, but most people find themselves in that situation, at least to a small degree. Private citizens who carry personal debt are called consumer debt. Go here to learn about consumer debt.
The consumer holds these directly instead of by businesses or government agencies. You can carry credit cards, auto loans, student loans, payday loans, even home loans, with mortgages being a significant portion of consumer debt for each household.
You’ll find some consumer products are predatory and mean to create a vicious loop of debt depending on their services. For instance, payday loans offer exorbitant rates making it a challenge to pay when it comes due, and credit cards with their high-interest rates getting tacked on, making paying these off virtually impossible.
The best thing to do is avoid payday loans at all costs and try to pay the credit card balance each month when it comes due. Go to https://www.consumer.ftc.gov/articles/0150-coping-debt/ for guidance on coping with debt.
Anyone in debt might not see it. Still, there are advantages to having consumer debt along with some cons to being in over your head with too many bills.
Advantages of having consumer bills
- In order to build a credit history, it’s necessary to have a consumer following that others can check to determine if you’re a reasonable risk. That can be especially true with a potential landlord, for a possible extension of a line of credit or other essential quality checks.
- Having a consumer backlog to fall back on makes you more appealing to vendors like car dealers who would rather work with someone with these debts and show their ability to pay than those who don’t.
- Some of these consumer debts are some that will eventually add value to your life and personal situation. This is why a mortgage deems an investment more so than a purchase or is even viewed as a debt. Some people might disagree with the large payment taken each month.
Cons of Consumer Debt
- Being over your head with bills is costly and can make it challenging to accomplish other financial goals. If you reach out for some things that typically a consumer debt can afford you, you might find you have too much.
- It can be easy to find yourself getting behind even if there’s merely a small shift in the budget or a minor setback due to the excessive interest and compounding debt. Even the safest forms of debt, like a mortgage, carry risks.
When you reach the point where you want to eliminate some of the bills you have accrued since they’re getting out of control, you have difficulty paying all of them on time each month, plus dealing with other financial obligations; it’s a significant commitment.
It will take time, effort, and considerable responsibility to follow through, avoiding adding more to your debt ratio.
While credit cards seem so easy to use with no repercussions, eventually, you get the bill and see the interest you’ll be paying, especially when you can’t pay it off each month.
That’s a harsh reality. It’s critical to find a solution to help you solve the problem without damaging your future financial goals. Two options are refinansiere furbruksgjeld (refinance consumer debt) and debt consolidation. Each is viable, but you need to determine which will work the best for your needs.
Credit card Refinancing helps consumers with good creditworthiness decrease the rate on their credit card debts to 0% but only for a short period. The method involves applying for an introductory card with a balance transfer having 0 interest but a large balance. Hence, it accepts the debt transfers with no interest charged on the balance during the introductory period that lasts up to 18 months.
If the balance isn’t paid within that time frame, the interest can rise to as great as 20%.
If the strategy is to be successful, the applicant needs a high credit score to qualify for this type of 0% card and have little trouble paying it off during the grace period.
This method involves taking out a low-interest loan to combine all the debt into one single monthly payment. You can either use a secured loan or an unsecured personal loan.
These might be a bit harder to get since there’s no collateral and more risk for the lender. That can mean higher interest, but it won’t be comparable to the high interest on credit cards.
Refinancing and consolidation are the two standard methods for dealing with consumer bills. The goals are similar in reducing the overall high-interest debts, but the paths are vastly different.
You benefit from no interest for as long as perhaps 18 months with a refinancing. Everything goes to the principal, giving you an edge and the opportunity to pay it off within that grace period. If you don’t make it, all the interest accrues, which can be as much as 20%.
Debt consolidation interest rate can be as low as 4% and as high as 35% based on creditworthiness and possible collateral.
Refinancing can work, but the new card must have a sufficient balance to transfer your debt to the card. First, you need to ensure you have a good credit score to qualify for the card and that you’ll be able to pay it off within the introduction period.
If your interest is just lowering payments, it might be worthwhile to avoid a 0 interest card and stick with one that offers 15% compared to your 20 APR. That will save costs.
Advantages of Refinancing
- You can get yourself clear of debt by eliminating credit cards
- Refinancing is an easy process to apply with good credit with generally fast responses
- There are no interest charges due during the introductory period; everything goes to the balance since its a 0% rate
- You can save considerably if the credit limit is sufficient to take your total balances.
Consolidation gives you significantly more time to pay off your debt balance at a friendly interest rate. It can be beneficial if you have good credit and can commit to a monthly fixed rate; for those who find that a bit stifling, it might not be the ideal situation.
The good thing about a personal loan is that it consolidates all the debt into a single, monthly fixed payment. You’ll be able to budget your other financial obligations around the expense, and you’ll know exactly when the term of the loan will come and when it will be paid in full. With a refinancing, there’s no guarantee you’ll make it in time for the end of the introductory timeframe.
Advantages of Consolidation
- A single monthly payment instead of struggling with many high-interest bills
- The ability to get a personal loan means no need for collateral but could mean a bit higher rate
- Fixed repayments and terms so you know when the loan will be paid in full
- The repayment term for consolidate can be as great as five years
- Typically low-interest rates
Ultimately one of the primary considerations is creditworthiness which will play a role in whether you qualify for a balance transfer card with the perks you need it to have. If you have good credit, the next decision is whether you can pay the balance within the allotted introductory time before the exorbitant interest rates kick in. If not, you’ll be sort of right back at square one.
If you just can’t imagine being able to pay a few thousand dollars within a short grace period, consolidation makes more sense. The balances are paid off right away, and you’re left with a monthly fixed single amount due over an extended timeframe; usually, a period of 3-5 years, depending on the type of loan you take.
Refinancing places a lot of pressure on the debtor to attempt to get their balance paid before the clock runs out. The consolidation method offers no sort of pressure; instead, handling the bills upfront and sets you up to pay back the money in an easy, stress-free manner.