Have you ever heard about debt consolidation?
I stumbled across this term by over hearing a conversation with my aunt. She was talking about how her friend was able to acquire a loan from a bank to pay off all her debts from other financial institutions.
Then I asked myself, how many people know they can use debt consolidation as a stepping stone to get out of debt?
I believe most people think there are only the standard ways of reducing their debt. You’ll hear many people say some part of the following phrases:
“Make more money to pay off your debt faster.”
“Save money by cutting down unnecessary expenses.”
“Invest your savings to grow your wealth.”
These are all useful in helping you on your way to becoming debt free but debt consolidation is important and should be considered.
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Well, now I’ve got your interest, you need to know what debt consolidation is.
What Is Debt Consolidation, and Could It Help Your Budget?
The process of “debt consolidation” is something that a lot of people begin to consider when they find themselves struggling to manage both the interest payments and complexity that comes with keeping on top of numerous debts at once. Debt consolidation involves taking out a personal loan that will allow you to repay all or some of your outstanding debts so that you can bring all your monthly repayments together in one place.
With debt consolidation, you can combine the expenses of your other personal loans, as well as store card and credit card debt, into a regular monthly repayment. Although it’s important to note that the debts that you had before you began your consolidation process won’t simply disappear. You could find that merging them together with a single personal loan could help you to minimize your monthly outgoings and ensure that you know how to manage your outgoings more effectively.
Ultimately, debt consolidation could be a solution that helps you to make sure that managing the daily expenses of life is simpler.
How Does a Debt Consolidation Loan Work?
When you take out a debt consolidation loan, you go and see a bank or building society who is willing to give out a personal loan. However, this institution will need to be informed that you’re planning on using your personal loan for debt consolidation. When you engage in debt consolidation, you will be moving all your borrowings into one loan. In other words, you’ll be able to borrow enough money to pay off all the loans that you currently have.
With a debt consolidation loan, you should be able to close down the various loan agreements and credit cards that you’ve had in the past, thanks to your consolidation money. This means that instead of paying numerous payments to different lenders each month, you’ll be able to make one single repayment each month to your consolidation loan provider.
Remember, when it comes to paying off different loans, it’s important to make sure you know about any early repayment charges that you might be subject to. You will need to factor these expenses into your decision as to whether a personal debt consolidation loan is right for you.
Because you’re taking out a personal loan, you should be able to rest assured knowing your debt consolidation loan is unsecured. This means your lender won’t be able to claim your property or home if you struggle to keep up with your repayments. Of course, this doesn’t mean that you should be casual or unconcerned about paying back whatever money you owe. You could still be taken to court when it comes to pursuing money.
However, make sure that you’re wary of any secured personal loans, as these can be incredibly risky.
Should You Get a Debt Consolidation Loan?
The decision whether or not to get a debt consolidation loan will be something that’s personal to your specific circumstances. There are many advantages to a debt consolidation loan.
1. Easier to manage debt
For instance, you can move all your debts into one place, which means that you only have a single interest rate that you’ll need to keep track of. At the same time, you may find that managing debt is more straight forward because you only have to make one payment per month.
2. Better credit scores
Some people who take out debt consolidation loans discover their credit ratings start to improve. After all, you can close various credit card accounts that may have been leaving a black mark on your name and convincing lenders that you don’t know how to manage your spending responsibly.
Unfortunately, there are risks for debt consolidation too!
1. Potentially higher interest rate
You might find that you end up dealing with a higher interest rate. For instance, if you’re transferring your credit card debts into a consolidation loan, you might end up paying more interest than if you had kept those balance on a transfer card that delivers a 0% introductory period.
2. Early repayment penalties
Additionally, there’s a possibility that you’ll need to manage early repayment penalties too. These are costs that some lenders will charge you if you try to pay off a loan that you have with their company before a fixed term ends. Make sure that you check out your terms and conditions for more information on how expensive those charges may be.
Remember, when you’re consolidating debts, you’ll need to think about a number of things, including the interest rates you can expect to pay. Usually, rates are tiered depending on how much you borrow, and you might find that borrowing slightly more could help you to pay a lower rate of interest. Remember, never borrow more than you can afford – even if it seems like it might be a good idea in the long run.
When planning your financials, consider debt consolidation as an option to managing your debt.
Thanks for reading!
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