Are you steeped in mountains of debts and want to get out of them? If so, you aren’t the only one.
According to the latest figures from the New York Federal Reserve, there are alarming levels of debts within U.S households with total debt levels hitting $12.29 trillion. Apart from mortgage, consumers owe almost $4 trillion on student loans, auto loans, and credit cards. If you belong to this group of people looking to free yourself of debts, you may want to consider debt consolidation.
The Basics: What is Debt Consolidation?
A debt consolidation loan refers to a loan that you take to pay off numerous other smaller loans. People who opt to consolidate their loans do so to reduce monthly debt repayment and so improve overall cash flow. Even more important reason is to get a reduced overall interest rate.
Debt consolidation typically involves replacing your high-interest short-term loans (for instance credit cards, personal loans and store cards) with a loan that has a lower interest which usually comes with a longer term.
Debt consolidation allows you to start on a clean slate by converting your several existing loans into one, convenient monthly loan payment. Doing this also saves you from multiple fees, debit order charges and service charges on the various multiple loans.
The net effect of consolidating your loans is that you will pay a lower monthly repayment compared to what you would have paid on total repayments of your smaller loans, and this will be good for your cash flow. In conclusion, if you are struggling to make your monthly commitments on your debts, loan consolidation can be a pragmatic solution to avoid unfortunate events like repossessions and foreclosures.
What are the benefits of debt consolidation?
• Reduced repayment and interest rate
One advantage of debt consolidation is that it may give you a lower interest rate and lower payment. However, this usually means a longer payment term.
• It simplifies your payments
Having to pay off numerous companies every month can be quite tough and demanding. Debt consolidation enables you to make one monthly payment as opposed to several payments to different companies. This makes it easier for you to manage payments.
• A definite timeline to settle your debts
Majority of consolidation programs are meant to help you settle unsecured loans completely in two to five years, with the only exception being student loan consolidation, which usually takes longer.
• Improve your credit score
Consolidating your loans can help you gradually improve your credit rating by giving you an opportunity to begin building your track record of meeting your monthly commitments not only on time but also in full.
• Save money on late fees and fines
Through consolidating several loans into one, manageable loan, you only have a single monthly payment every month. This alone significantly reduces your risk for late payments and any accruing additional fees.
What are the potential drawbacks of debt consolidation?
• May Require Minimum Debt Amounts
Not all debt amounts may qualify for debt consolidation. Some companies may impose a certain minimum amount of debts that you must have to qualify for loan consolidation programs.
• It might not be quick
If you are looking for a quick fix to your financial imbroglio, you may want to try something else but not debt consolidation. It typically requires that you meet up with a debt counselor, set and stick to a strict budget and develop a habit of making timely and full payments over many years.
• It could be more expensive
If your consolidation program includes extending your new loan’s term, you could pay more in interest payments in the course of that period.
• Could Injure Your Credit Score
Some debt consolidation options could lower your credit score in the end.
When is the best time to apply for debt consolidation?
The following are some of the situations you should use debt consolidation for:
• You want to pay off a credit card debt. This type of debt carries high interest and it’s logical to use debt consolidation.
• You have consumer debts (for instance retail stores debts and high-interest auto loan)
• You aren’t paying off your principle for small debts and are instead paying high-interest. This might mean that your debt grows every month. The best choice is to attack the interest.
• You have a lot of positive equity in your home. In other words, the value of your home far exceeds the total amount of debts you owe. It is very wise to use that leverage for saving you some money.
What are the requirements to qualify for a debt consolidation loan?
There are certain things that creditors want to see before they agree to get you into a loan consolidation program. Some of them include:
• They want you to have an acceptable credit score (but this doesn’t mean you have to have a perfect credit score)
• A regular income on your part gives creditors confidence that you will meet your monthly payments. Without it, it may be hard t qualify.
• You must provide proof of reasonable monthly expenses level (you may want to cancel that Lamborghini lease).
The long and short of it is that, lenders want you to show that you are capable of making the monthly consolidation commitment, apart from meeting your monthly expenses and bills.
A stained credit rating will hamper your chances of securing a debt consolidation program, therefore it’s important to review your options of dealing with your debt and take action as soon as possible. Debt consolidation is just one of the numerous options available to you.
Secrets to successful debt consolidation
Although debt consolidation looks like a good thing on the face of it, it’s still common to find that some people take out these loans but still find that they are n worse shape than when they borrowed. It all has to do with how you use the loan. Here are some useful debt-consolidation secrets that will ensure you become better off at the end of your payment period.
1. Prioritize Your Debt
Sometimes, it may not be possible to borrow enough money to consolidate all the high-interest debts that you have into one loan. If that is the case, you need to prioritize your loans based on how expensive they are. Pay the most expensive loans first. This reduces the money you pay as interest charges, which will save you money in the long run.
2. Control Your Spending
Debt consolidation has a hidden trap that you must be careful not to fall into and this is continued excessive spending. For instance, when you reduce the amount of money that you used to spend monthly to pay your debts leaves you with some extra cash that you can spend on other things. This may make you to start spending more, which will eventually make your financial situation even worse.
3. Assess Affordability
The biggest appeal of consolidated loans is that they give people more affordable payments. It’s based on the idea that consolidating your high-interest loans lowers monthly payments because of lower interest rates.
However, you have to assess the affordability of a loan before you take one. Make sure that your budge is sufficient enough to handle monthly payments the lender is offering you. Otherwise, you may want to find another debt relief method.
Busting the Popular Debt Consolidation Myths
Certain things have been bandied about debt consolidation. While some may be true, others are downright trash. In this section, we debunk some of the popular debt consolidation myths.
1. Debt consolidation is only meant for those in dire financial straits
No. As long as you have multiple loans and you want to combine them into a single one and pay them off much faster, you can get a consolidation loan.
2. It hurts your credit score
This is not necessarily true. If you do it properly, through paying off your loan faster and not getting steeped in further debt, consolidating your debt can actually improve your credit score.
3. You need to possess a home to qualify
Not necessarily true. Home equity loans are a popular solution for debt consolidation. However, there is an inherent risk that you could give up your home if you are late in payments. But you can obtain a personal loan to consolidate your loans.
4. You need credit counseling to go for debt consolidation
This is a fallacy. Debt consolidation loan is just like an ordinary loan. Of course, if you got into your current debt situation because of lack of discipline in spending, debt counseling might not be a terrible idea after all.
Debt consolidation is one of the debt relief methods that people turn to when they want to fix their financial problems. It is about getting one loan that you will use to pay off all your smaller, high-interest debts. Although the loan takes a longer term to clear, it leads to reduced interests and hence reduced monthly payment. Another benefit of debt consolidation is that it simplifies your payments so you don’t miss out on your loan repayments.