Guide to Debt Consolidation

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. Debt consolidation is only applicable on unsecured debts. For instance credit card bills, unsecured business loans, education loans, personal loan for car etc.

How Does it 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. WIth this you get a lower interest rate.

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.

Turn Multiple Payments into a Single 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.

Lower Interest Rates

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. Interest rate compare is a must thing to do before applying for credit cards.

Can Improve Your Credit Score

Consolidation loans is possible by taking out a personal 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 utilization rate. it can give your score a nice boost.

Credit utilization 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 utilization rate is 50%, Credit utilization 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.

Easy 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.
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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

If not done correctly you might end up paying more. Though with a good loan company the chances are very less.

● 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

Alternatives to Debt Consolidation

1. 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.

2. 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.

3. Debt Settlement

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.

Debt consolidation can only work if you manage to get a personal loan with a lower interest rate. To avoid such a situation, you can be more cautious with your credit and make sure there are no multiple debts in the future.