Of course, single obligation can be
stressful, but what if a person has to pay many credit cards, loans, and bills
on a regular basis? If you’re being overwhelmed by interest rates or varied
date for the payment of your deb – consolidation of debts may be a solution
that might interest you. However, to get started, let’s define what debt
consolidation is, how it works and whether it may be a useful option for you.
What
Is Debt Consolidation?
Debt consolidation is the process of
collapsing many of the debts that one owes into one big payment with a lesser
interest rate. If instead of paying several debts one by one, you discharge one
or turn to a balance transfer credit card to do it, you are left with one
payment to make. The benefit is to make the financial process easier and
possibly, save you more amount of interest that you would have been charged.
Types
of Debt Consolidation
The number of strategies to pay off
debt is large, and all of them have advantages and risks few people mention.
Personal Loans Personal loans
for debt consolidation enable an individual to borrow a large amount of
money that s/he can use to clear several debts. You will then continue
paying a regular installment to clear the loan for an agreed period of
time. Home loans are slightly cheaper as compared to credit cards, and
therefore those with high rate credit card balances typically gravitate
towards taking out personal loans for consolidation.
Balance transfer Credit cards
with a balance transfer credit card, you transfer several high interest
debts to a particular credit card with a lower or no interest rate for
some time, usually 12-18 months. This may reduce the amount of interest,
however it is weighted with the fine print, most of them may charge
heftily once the promotional period is over.
First of all, for people who
own houses there is an opportunity to get the home equity loans and home
equity line of credit (HELOC) to pay for the debts. These are actually
secured loans, which require your home as security, and therefore they
attract lower interest rates than do other loans. Nonetheless, the danger
is that if you are unable to make the payment you could lose your home.
Debt management
plans these are provided by credit counseling agency, where the agency
pays your creditor on your behalf then negotiates for lower interest and
come up with realistic payment plan. What you then do is pay a lump sum
every month to the agency and the agency in turn pays your creditors.
Pros
of Debt Consolidation
Lower Interest Rates:
Debt on one combines all of your dues and save money by receiving lower
interest on the amount borrowed.
Simplified Payments:
This way you don’t have to remember several debts and you will just need
to pay one payment per month thus simplifying a financial situation.
Fixed Payment Schedule: When you take a personal loan, there was a timeline
given when you will be required to clear the amount and this time line
make you to be very productive.
Potential to Improve Credit Score: Reducing high-interest balances and making regular
and on-time payments on credit grows the credit score.
Cons
of Debt Consolidation
Upfront Costs:
Debt consolidation, by means of personal loans or balance transfer credit
cards, sometimes attracts charges like balance transfer fees, instrument
fees or closing costs.
Risk of Falling Into More Debt: First of all, consolidation does not solve the
problem of your debt. That is, if you keep going right variously or take
on more debts you will find yourself in a worse state as before.
Collateral Risk:
If you so use the home equity loan or HELOC for debt consolidation, then
you stand to lose your home if you failed to meet payment.
Extended Repayment Terms: While, securing lower monthly payments seems like a
good idea, it is also an indication that one will be in debt for a longer
time than preferred and of course be charged more interest in the long
run.
Is
Debt Consolidation Right for You?
Debt consolidation can indeed help
to get out of debt, but it does not mean that it is the best way for everyone.
Below are some issues that should be considered, before proceeding any further:
Debt Amount Debt
consolidation is most beneficial especially to those who have large
balances of high interest debts, for example credit card debt. In case of
a small amount of at least, it is reasonable to repay it in a short amount
of time without consolidation.
Yours Credit Score You then
get points for your credit score especially when it comes to getting
approved for a low interest personal loan or a balance transfer credit
card. However, if your credit score is good or excellent then you’ll
qualify for better rates hence making a debt consolidation noble.
If poor spending habits are
to blame for your current state of indebtedness, then consolidating your
debt will not help if proper spending habits are not employed afterwards.
You have to opposite the source of the problem and be willing to improve
your financial handling in order not to fall back in the debt trap as you
seek consolidation.
Consider your needs and wants
for the future of your finances In other words, consider long-term goals.
Do you want to be debt free in a shorter time? Save money on interest?
Simplify your payments? Credit consumption is undesirable if it leads to
these, but consolidation can be of help here if used purposefully.
Debt Relief Tools If you are
hard placed to afford even the monthly installments on your debts, then
consolidation becomes a bad debt tool for you. At other times, bankruptcy,
debt negotiation, or credit counseling will be more suitable.
Steps
to Take Before Consolidating Debt
List out your debts and their
characteristics Assets and liabilities list all the debts, their rates,
and monthly repayments. This will help you check whether or not
consolidation is right for you.
Get a Credit Report You’ll
need a great credit score to get a good interest rate. In case you still
have a low credit score, you should first try to improve it before you
consider debt consolidation.
Shopping for Rates If you are
going to be looking for a Personal Loan or a balance transfer credit card
shop around for the best rates. While applying for loans use the internet
to compare the various lenders, and ensure you read the terms and
conditions carefully.
Have a Repayment Schedule
Before they go for consolidation, one must be very sure of how and when
the consolidated amount would be repaid. Plan your monthly budget with a
reasonable and new payment plan which you can adhere to.
Conclusion
Managing debt by consolidating them
is a reputable approach to managing a person’s finances while trying to reduce
interest charges but one must understand that this strategy is not for
everyone. If you are in a position where you need to consolidate your debt,
knowing how consolidation works in terms of benefits and drawbacks and your own
finances can help you decide if it’s best for you. Finally, it remains
necessary to perform reasonable financial actions and make a proper plan to
live without debt for the rest of life.
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