Opting for a debt consolidation loan is a big step and not something everyone needs to consider. To decide whether a debt consolidation loan is right for you, please reach out to our expert financial advisors for personalised advice for your situation.
What Is Debt Consolidation?
Debt Consolidation is the process where you roll all the multiple debts into a single loan.
This can be done by availing a personal loan or a debt consolidation loan with a suitable term structure such as a lower interest rate, lower EMI, term, etc. The loan amount that you receive after the loan is sanctioned is used to pay off all multiple debts.
How Does Debt Consolidation Work?
When you receive a debt consolidation loan, the company lending you the money either uses the funds to pay out the debts you jointly agree will be paid off, or they deposit the funds in your bank account and it is then your responsibility to pay out the debts or bills you wish to consolidate with the loan proceeds.
It is important to note that, to qualify for consolidation loans with a new lender, you must present a viable amount of income and creditworthiness in order to be applicable for lower interest rates.
Before considering debt consolidation, it’s important to be aware of the advantages and disadvantages. You might not hear about the disadvantages of debt consolidation. Sometimes it’s possible you can actually end up paying more in interest over the life of the loan depending on the terms of your new loan. Having a good financial advisor and loan company can help you choose the best option.
Advantages Of Debt Consolidation
The foremost advantage one can have is low interest rates after the consolidation and easy to manage debts because now you just have to take care of the one EMI. It CAN also help you keep a better credit score.
Combine Multiple Payments Into 1 Payment
- Debt consolidation makes paying down your debt much more simple and due to a longer pay off period can even result in lower monthly payments.
- If you have multiple credit card balances, consolidating everything into one single source will be a relief. Sure, your debt still exists but with multiple payment deadlines now gone, you can focus on just one debt source.
- Debts from credit cards are mostly unsecured and that’s why they have high-interest rates that can add significantly to the debt you have to pay each month.
- By consolidating the debt, you’ll be paying less in the long run by securing a lower interest rate on your new single account if you have good to excellent credit score.
CAN Improve Your Credit Score (In Some Cases)
- By taking out a personal loan or debt consolidation loan, it’s likely that you will see an increase in your score in only a few months since you’ll be reducing your credit utilisation rate
- Credit utilisation rate is how much you owe right now divided by your credit limit.
- If you have a total of $2,000 in credit still available on two different credit cards, with a balance of $1,000 on one of them, your credit utilisation rate is 50%, Credit utilisation rate plays a significant role in your credit score.
- But when you get a new loan you might see a little dip in your score, but the long-term gains you’ll see in both your credit score and savings on interest when consolidating debt make it a financially wise move.
Easier To Manage
- It declutters your bills and makes it easily manageable. Your credit card bills are known to be the reason for stress but by taking control of your finances and allowing yourself to stay on top of single monthly debt payment, you’ll clear up your mind and find yourself in a better financial position with mental peace.
Pay It Off Faster
- Another benefit of debt consolidation is that the consolidation process takes multiple factors into consideration when establishing the length of the loan, such as income, credit score, and how much you owe in order to come up with a sensible payback plan. That’s why, debt consolidation loans have a shorter payback period.
Disadvantages Of Debt Consolidation
If not done correctly, debt consolidation can have the opposite affect and you might end up paying more. Though with an loan provider who are experienced & knowledgable such as EFT Capital, you’re in good hands.
Some of the disadvantages may include;
- You still owe the same amount of money
- You might need to increase your payments and decrease the spending
- Term can be an issue as well if you are not able to repay on time
Debt Consolidation Alternatives
Make a Plan to Pay the Debt on Your Own
- Evaluate how much debt you owe and create a plan to pay it off in one account at a time. You need to see if you have enough funds available.
Credit Counselling Service
- They work as a credit advisor and manager of your debt. These agencies can help negotiate a better repayment plan with your creditors. They can help you with the reduction of the interest rate and the payment.
- You will need to pay the one monthly amount to the agency and they will pay the debt on your behalf.
- Debt settlement involves offering a total payment to a creditor in exchange for a portion of your debt being forgiven. This is where you can use your negotiation skills to pay the creditor a fraction of the outstanding debt.
Leave It To The Experts
Debt consolidation will only work if you manage to get a personal loan with a lower interest rate or debt consolidation loan from a specified lender. To avoid such a situation, you can be more cautious with your credit and avoid having multiple debts in the future.
For information specific to your situation, please get in touch with EFT Capital today!
Did you enjoy our blog post? Share it!