Debt consolidation is a financial strategy to manage your debt load. If you’re overwhelmed by debt, you can improve your situation and reduce the total amount of liabilities owed by taking a loan with more favourable payoff conditions. Debt consolidation allows you to combine multiple debts into a single loan with one monthly payment and interest rate. Many liabilities such as student loan debt and credit card debt can be addressed at the same time.
How Does Debt Consolidation Work?
Debt consolidation can relieve financial stress without the worry about multiple payments every month. If the debt amount is manageable, you may be able to organize repayment on your own by re-arranging payments based on due dates and interest.
However, if the amount is too large, it’s best to approach a financial institution with experience in debt consolidation. Based on your credit rating, you are likely to be offered a fixed-rate debt consolidation loan. Here, you can use the money from the loan to pay off the debt, and then pay off the loan instalments over a set period.
Alternatively, a 0% interest balance-transfer credit card allows you to transfer all your debt onto the card and pay the debt amount immediately. Bear in mind that you will need to have a very good credit score to take advantage of both these options.
Debt Consolidation vs Debt Settlement
It’s worth noting that debt consolidation loans do not eliminate the original debt. Instead, they simply transfer a customer’s loans to a new lender or loan type. Debt settlement, rather than or in addition to a debt consolidation loan, may be the greatest option for true debt relief, especially if you do not qualify for loans.
Rather than reducing the number of creditors, debt settlement tries to lower a consumer’s responsibilities. Debt relief groups and credit counselling services are available to consumers. These organizations do not make loans; instead, they work with creditors to renegotiate the borrower’s current debts.
How to Get the most out of Your Debt Consolidation Loan
For people who have multiple debts with high interest rates or monthly payments, debt consolidation is an excellent option. The single monthly payment with a reduced interest rate could significantly lower your instalment amount.
You can also look forward to becoming debt-free sooner if you don’t take on any additional debt. If the new loan’s payment cycle is kept up-to-date, going through the debt consolidation process can reduce calls or letters from money-lending agencies.
Here’s a look at the key benefits of a debt consolidation loan:
Low-Interest Rate Benefit
Personal loans usually have a lower interest rate compared to credit cards. Using your loan to pay off credit card bills will lower the interest you pay.
Single Payment instead of Multiple Payments
If you have multiple debts from multiple sources, you can organize your payment cycle to just one by taking a loan from a single source. Allowing you to pay only once each month over the tenure of the loan.
Owing to the lower interest rates of debt consolidation loans, you can save money and consider making extra payments. As a result, you’ll save on interest allowing you to pay off the loan sooner. Do take note, debt consolidation can lead to longer loan pay-off terms — so you’ll have to make sure that you pay your debt off early to benefit from this advantage.
Debt consolidation loans can help you organize your budget significantly by making it a single-source payment. It can also improve your creditworthiness, allowing easier approvals for future loans.
However, make sure that you opt for the right loan wherein you are saving not just on interest but also making payments that are manageable, considering your cash flows.