Are you dealing with too many creditors? Do you have too many debts that you’re finding hard to manage and clear? Well, there is a solution- debt consolidation.
Debt consolidation is basically the process of combining all your unsecured loans (like credit card balances, store cards, overdrafts, personal loans and so on) and consolidating them into a single, low-interest loan that gives you one easy and manageable payment to meet on a monthly basis. That’s why it’s called “debt consolidation.”
The main purpose of debt consolidation is to pay your existing debts.
How Does Debt Consolidation Work?
Technically, it’s impossible to merge all your loans because each loan has its own interest rate and repayment terms. Basically, each one of these loans is a contract where you borrow money and with the agreement to repay it over a certain period of time with set payments. Therefore, to consolidate these loans, you will need to take out a new, larger loan and use it to pay off the smaller loans that you wish to consolidate.
Basically, there are different debt consolidation loans to choose from. They include;
- Balance transfer credit cards
- Personal loans
- Debt consolidation loans
- Home equity loans
You can obtain a debt consolidation loan from your bank, a credit union, and finance company. You can also try a debt repayment program to effectively consolidate all your debt payments into a single payment.
When is Debt Consolidation a Good Decision?
Debt consolidation may be a good idea if;
1. You’re tired of juggling multiple credit accounts
The problem with having too many credit accounts is that it becomes too hard to keep track of the payments. Debt consolidation is a great way to simplify your monthly payments. This is because when you get a bigger loan to pay off your debts, it becomes much easier to meet your payments. Also, it becomes easier to keep track of debts’ due dates and amounts.
2. You’re struggling to make your monthly repayments
Repaying too many loans on a monthly basis can sometimes be hard especially if your monthly salary isn’t enough. You might end up missing some of the payments, and this can harm your credit score and lead to penalty fees for missed and late payments. So it’s definitely a good idea to consolidate your debts.
3. You want lower high-interest debts
Taking out a debt consolidation loan can save you money by reducing the interest rate. Debt consolidation loans often have lower interest rates. Therefore, you will be paying off high-interest debts with a low-interest rate debt consolidation loan.
4. If you need to improve your repayment terms
If you are looking to improve your repayment terms, then taking out a debt consolidation loan offers the perfect opportunity. For example, you can look for a loan that has better repayment terms like a shorter or longer repayment period, or lower fees and interest rates. It also offers a great opportunity to find a new lender with better terms.
How Do I get a Consolidation Loan?
To get a debt consolidation loan, you need to apply for one from your bank, credit union, or finance company. You also need to be eligible for the loan. Below are the requirements for a consolidation loan:
- Monthly income
- Payment history
- Credit score
- Credit history
- Total loan amount
- Timeline for repayment
- Home equity
Pros and Cons of Debt Consolidation Loans
Debt consolidation loans have their good side and bad side. Let’s have a look at their pros and cons.
- It can simplify your debt repayment plan.
- Helps you avoid juggling multiple credit accounts.
- May save you money because fees and interest rates are lowered.
- Easy to obtain since they carry less risk to the lender.
- Helps pay off debts faster.
- Helps avoid credit damage.
- Can help improve your repayment terms.
- If you pledge your assets as collateral, you could lose them all if you’re unable to repay.
- Consolidating your debt does not reduce your debt.
- If you fail to stick to the payment plan after consolidating your debt, you risk damaging your credit and may face hefty penalties.
Will Debt Consolidation Affect my Credit Score?
Debt consolidation can affect your credit score either positively or negatively depending on your credit utilization. When you pay off all your debts using the consolidation loan, it will seem as if you’ve paid off all your accounts, and this can help improve your credit score.
However, if you decide to transfer multiple loan balances to a single card and reach your credit limit, your credit score will definitely be negatively affected.
What is the Fastest Way to Get out of Debt?
If you want to get out of debt fast, here are some of the best ways to do so.
- Pay off your debt with as much as you can afford each month.
- Manage your credit cards responsibly.
- Create budget and make cuts to your spending.
- Freelance or start a side hustle to get extra money.
- Pay off debts with high interest first.
- Sell what you don’t need.
- Refinance your debt.
- Ask for lower interest rates on your credit cards.
- Get a part-time job.
- Consider a balance transfer.
- Drop expensive habits.