You’ve crunched the numbers and it’s clear: you can’t keep up with all these bills. Could a bill consolidation loan be the solution?
“Bills, bills, bills.” When Destiny’s Child sang about their bills back in 1999, they struck a chord with their audience, and not much has changed since. Bills are an unpleasant fact and a constant source of stress for most of us, no matter what our financial situation might be. Considering the fact that everyone can relate, it’s a surprise that more people don’t write songs about bills.
What’s not a surprise is that too many bills can drastically reduce a person’s quality of life. When your bills start to pile up and you start to struggle to pay them, they’re not just an annoyance; they’re a danger to your long-term well-being as well.
Credit card bills can be the worst of the lot. Unlike most other bills, such as utility bills and phone bills, paying your credit card bills can feel like you’re paying for nothing. It’s not as if you get something material in return for paying down your credit card bills, and besides, much of what you end up paying isn’t even for paying back the money that you spent, it’s for putting a dent in your interest.
That’s the best-case scenario. Worst case, you struggle to pay those bills at all. Maybe they cost too much; maybe you just can’t keep track of them. Whatever the reason, if you’re falling behind on your credit card bills, you’re in a world of trouble. Harassing phone calls from collection agencies are just the beginning; a faltering credit score and serious financial issues are soon to follow.
If that sounds like you, then a bill consolidation loan might be just what you need. Bill consolidation loans have helped many people in exactly that predicament get a handle on their finances. Nevertheless, what exactly is a bill consolidation loan? How does it work? Is it the right fit for you?
We’ve laid it all out for you below.
Types of bill consolidation
Bill consolidation, also known as debt consolidation, comes in many different forms, including loans. You should be familiar with the major ones before you decide what’s right for you. The three most common forms of bill consolidation for credit cards are the bill consolidation loan, the balance transfer credit card, and debt settlement.
Bill consolidation loan
With a bill consolidation loan, you approach a lender for a secured or unsecured personal loan equal to the total amount of your credit card debt. The lender runs the numbers and, if it decides that you’re a good investment, it will approve you for the loan.
You then use that loan to pay off all your debt in full. You have one form of debt left and a much clearer path to financial stability.
Why go through all that trouble just to consolidate your debt? Because a single bill consolidation loan is much easier to keep track of than a ton of different debts from various creditors. Payments on bill consolidation loans also often save people money in the end, too. The total monthly payment may be large, but it’s likely going to be less than what you currently pay on all your monthly minimum payments combined. It’s also likely that you’ll pay less interest over time, since personal loans tend to have much more forgiving interest rates than credit cards do.
You should bear in mind that not all bill consolidation loans are the same. If you’ve done your research, you’ve probably already heard of the two major different types of bill consolidation loans: secured and unsecured.
Unsecured loans are your normal “signature” loans. With unsecured loans, the lender lends to you based on your creditworthiness alone. It looks at your credit score and your background, sizes you up, and determines that you’re a reliable investment that it can count on to keep up with your loan payments. You sign on the dotted line and get the loan.
With a secured loan, it’s not quite that easy. Secured loans are “secured” with collateral, which can be any major asset that the bank could potentially make money on through resale. Collateral for bill consolidation loans is often your car or house. If you fall behind on your payments, the lender can legally seize and resell that collateral. The collateral is “security” for it in the sense that it can be certain it will make at least part of its money back on the loan, no matter what. That’s why banks usually offer secured bill consolidation loans to individuals with worse credit; they assume that bad credit indicates a person is a less-than-reliable investment.
Balance transfer credit cards
Opening up another credit card in order to get out of credit card debt seems crazy, but it can actually be a viable bill consolidation strategy when you go about it the right way. The balance transfer credit card might be the key to finding some financial breathing room and paying off your debt for good.
With the balance transfer credit card method of bill consolidation, you find and apply for a credit card with a high limit and a 0% introductory APR promotion. The 0% APR is the most important part; it means that, for the introductory promotional period, you won’t accrue interest on the balance of the card.
Once you get the card, you use it to pay off all your other credit cards at once. That’s when the clock starts. Your goal from that point on is to pay off the entire balance of the card, or at least a major chunk of it, before the promotional period ends and the card starts to accrue interest.
Done right, the balance transfer credit card method of debt consolidation is almost like pushing pause on your debt. By postponing the accrual of additional interest, you ensure that every dollar you put toward your debt goes toward reducing (and eventually eliminating) your balance.
Debt settlement is probably the most difficult form of debt consolidation to get a handle on, but it can still be extremely effective under the right circumstances.
Imagine if you decided to stop paying your creditors without a plan. That would obviously be bad.
With debt settlement, you stop paying your creditors directly for the time being, but you do it with a long-term strategy in mind.
You find a third-party debt settlement company that knows what it’s doing. That company opens up a savings account for you, where you pay a sum of money each month instead of paying your creditors. Good debt settlement companies may also ask that you close all your credit cards to avoid the temptation to run up any more debt. Ideally, the debt settlement company will also act as a buffer between you and your creditors, who won’t be happy that you’ve stopped making your monthly payments.
Once you’ve saved up a sizeable amount in your savings account, the debt settlement company springs into action. It approaches your creditors with an offer they won’t want to refuse: take a lump sum payment now and forgive the rest of your debt.
The hope is that your creditors will take the easy money now instead of continuing to expend time and resources hounding you to make you pay your minimum monthly payments.
The result is you get out of debt much quicker and for much less than you would have otherwise.
Now that you understand the different forms of bill consolidation, let’s focus in on the most popular: bill consolidation loans.
Why get a bill consolidation loan?
People get bill consolidation loans for a variety of reasons, and shady bill consolidation companies will give you a laundry list of justifications for taking a loan out. When it comes down to it, though, there are really two major reasons why people take out bill consolidation loans, namely less stress and more forgiving payments.
Bill consolidation loans lead to less stress
Part of the stress of being in debt is the planning of it all. Say you have multiple credit cards open at once, all with outstanding balances. Each credit card has a different monthly payment amount. Each credit card has a different monthly payment date. Each credit card has a different interest rate, online payment portal, limit, features, and so on.
Now imagine you’re barely making enough money to scrape by. In your household, every penny counts, and it takes a whole lot of organization just to make sure you pay the bills on time. Keeping track of one credit card would be bad enough, but staying up-to-date on four or five is a full-time job in itself.
Bill consolidation loans can eliminate a ton of this stress simply by reducing the amount of payments you have to make. All you need to keep track of is a single amount on a certain day of the month. Suddenly, managing your finances and keeping track of everything becomes a lot easier.
Bill consolidation loans can save you money
Bill consolidation loans aren’t a sure thing to save you money, but often that’s exactly what they do.
On a monthly basis, a bill consolidation loan might save you money just by reducing the total amount you pay out-of-pocket to stay current on your debt payments. It will still be a large lump sum, but it will likely be less than your old payments combined. Which would you rather pay: $100 once a month or $40, five times a month?
In the end, your bill consolidation loan might save you money with a more forgiving interest rate. As we’ve already mentioned, personal loans tend to have much lower interest rates than credit cards do. A lower interest rate means less interest accrued each month. It also means that more of each payment goes toward paying down your actual debt.
Is a bill consolidation loan right for me?
You might be thinking “Wow! Bill consolidation loans sound great! They can reduce my stress, save me money, and give me a realistic, efficient path out of debt. Sign me up!”
Not so fast. Yes, bill consolidation loans can sound like a godsend to someone who is struggling with multiple different sources of credit card debt. However, they’re not an easy fix or a cure-all, and they’re not right for everyone.
The main thing you have to realize about bill consolidation loans is that they don’t actually fix your problems. Sure, they help you pay off your debt more efficiently. Sure, they help you find some financial breathing room. However, they don’t actually have any bearing on the behaviors or circumstances that got you into debt in the first place.
Maybe you got into debt through no fault of your own. A sudden health scare for you or one of your family members forced you to max out all your credit cards just to keep up with the medical bills. That’s understandable and, sadly, common. You could maybe stand to start saving up more money so that you have an emergency fund in case something like this happens again.
However, if you got into debt because you were overspending on credit, trying to live outside of your means, then you need to take a serious look at your behavior. A bill consolidation loan won’t be able to fix a lack of financial discipline. It might even make things worse, since it will clear up all your credit lines to be irresponsibly overused again. If you don’t change your behavior, you’ll end up in debt all over again with a loan payment on top of everything else.
If you feel like you understand bill consolidation and you’re ready for it, though, National Debt Relief can help. Check out our reviews to get a handle on how we do business and contact us today!