We shall start up with understanding what is DEBT CONSOLIDATION –In simple terms it means to get a single loan to pay all of your smaller loans. The ideology behind debt consolidation is that making one payment every month seems easier to manage & the new loan may result in lower interest rate, lower monthly payment or a combination of both.
Debt consolidation loans are of 2 types:
Under secured debt consolidation loan borrower can avail the loan amount depending upon the value of collateral pledged against the loan. Secured debt consolidation loan can be availed by anyone who agrees to place some valuable collateral i.e. regardless of their credit history borrower with good or bad can apply for secured debt consolidation loans.
In unsecured loans, the asset is not required as collateral. If the borrower fails to pay the money of the loan, the lender can eventually obtain a court order in an attempt to recover the money. The added risk for lenders results in higher interest rates. Approval of such loans are primarily based on borrower’s credit score (in addition to income and total debt).
People pitch to debt consolidation by highlighting 3 salient features:
LOWER’S YOUR MONTHLY PAYMENT AMOUNT
By consolidating all the debts they might lower your monthly payment amount but the reality is by lowering the monthly payment it is likely to take longer time to clear the debt.
REDUCES YOUR INTEREST RATES
It might be possible that the new loan may be available at lower interest rate but it often ends up with higher total interest to be paid.
MANAGEABLE MONTHLY PAYMENTS
We get enticed by the idea that instead of multiple we only have to pay one amount each month. But there is lot more in picture which seems unseen.
So to decide whether Credit card Consolidation is a Good idea or not: One must work on planned budget & improve savings & spending habits.
A very famous financial author once quoted-“DEBT IS NOT A PROBLEM; IT IS THE SYMPTOM OF OVERSPENDING & UNDER SAVINGS”.
Get rid of pending debts and liabilities
Debt consolidation is one of the competent ways to get away with your current debts. As per this, all your debts are rearranged into one single loan where the interest rate is on a lower side. If you are striving hard to break out of debt, a consolidation loan will surely deliver you from this situation.
It can also be said that debt consolidation allude to a loan which is, particularly, taken to get rid of pending debts and liabilities. There will only be one single loan for which there will be a single monthly payment.
Related – 13 Carcinogenic Debt Consolidation Myths You Ought To Know In 2017
Pros of debt consolidation
- Getting rid of bill collectors – Collection agents can really unsettle your daily schedule, this is where enrolling for a debt consolidation loan can prove beneficial. This will put an end to all annoying calls & letters and you no longer have to deal with the collection agents.
- Organizing bill payment – With the help of debt consolidation, you get to reorganize your repayment to varied creditors, thus making one single monthly payment. When you have one single bill to pay in a month, you have to care less about making minimal payments to different organizations. Moreover, you get to extricate yourself from remembering the due dates every single month. All you need is to pay a bill every single month and you no longer have to take care of the accruing late or missed payments.
- Fixing the credit – If you are not able to cope up with the monthly payments of your credit card, there are strong probabilities that your credit rating is descending. While your credit report card may undergo a primary ding, all the negative records of missed payments instantly stops when you enroll yourself in a credit relief program.
- The prime most advantage of debt consolidation is that all our debts are in one place, so we have only 1 interest rate to keep track of & one payment to make every month.
- Debt consolidation aids in managing debts effortlessly because you have to make 1 monthly payment to your financial institution, rather than bunch of different payments to different lenders.
- Using debt consolidation one can also close down other credit cards & loan accounts which will revamp their credit rating by showing lenders that your finances are managed properly.
- Since the interest rate of the new loan is generally lower than the existing small loans, you will pay less of your money to interest, getting you out of debt faster.
As and when your consolidation agency receives timely monthly payments, they further update leading credit bureaus, thus helping your overall credit ratings to improve.
- Constant Instructions – A reputed debt consolidation agency will not only provide you loan so that you can pay off your creditors, instead they should impart information that will help you to make you more responsible towards your finances in the coming times.
You should acquire knowledge of setting up a budget, set financial goals for the coming future and plan an emergency fund by taking guidance from a reputed credit card consolidation company.
Cons of Debt Consolidation
- Unjustified Fees – There are consolidation agencies which charge high fees and interest rates are also on a higher side. This will mean that you will use majority of the monthly installment to pay off the interest, thus making it difficult to pay off the debt. The interest rates can also rise unexpectedly, worsening the things for you.
- Low Interest Rates – Majority of the people are of the view that the low rate of interest will help them to save more which is not correct. Usually the term for debt consolidation loans stretches for a longer duration, this will mean that your total interest payments will amass to pricey debt.
If you think that paying off short-term debts such as personal loans or credit cards over a longer duration, with a lower rate, will be a good idea, think again. In real terms, this actually means that you will have to pay more interest in the future
- Additional debt – Some people have a wrong illusion that debt consolidation is a way through which they can get rid of the debt. Alas, majority of the consumers are of the view that the zero balance is actually a green signal for them to go extravagant while spending. But, all this will only end up making things worse.
- Cutting down the debt – Debt consolidation replaces current debt with another debt which most of the people don’t realize, so this cannot be a solution for all those consumers who are over-indebted. There are certain things that you should follow for financial well-being – spend less, save money and pay your debts with your money.
- One of the main disadvantages of debt consolidation is that one might end up paying more interest than you need to on some of your borrowing. Debt consolidation can make debts more expensive and may take longer to pay them off. One must remember when we consolidate debt we end up owing same amount of money but the difference being that the length of the term increases which indicates paying more money through interest.
- Debt consolidation may reduce your monthly installment & give you short term breathing space but it will result in paying interest for longer tenure.
- It’s a myth that debt consolidation reduces your debt rather it may lead to more debts by giving you an illusion that the debt is being paid off.
- If you have used your house or any other valuable asset as collateral you can risk losing it if you are unable to pay the loan installments.
- Therefore debt consolidation is not a solution for over indebted consumers. In order to get on track of financial well being one must spend less, save for emergencies & pay off their debt with their own money.
- Next point to be taken into account is that how do you qualify for debt consolidation loan:
- To see if you are eligible for consolidation loan the lender would examine your credit rating because lending institutions will use your credit score & payment history to determine risk. If borrower has bad credit history or large debts, the borrower may offer a secured loan.
- The lending institutions also delve into the regular source of income of the borrower to analyze whether you will have enough cash to pay the loan installment after meeting your daily living needs.
- Lending institutions may need a cosigner for the loan or provide collateral such as house or car, which borrower will pledge as security to ensure he pays back the loan.
Should I choose debt consolidation
At the end of the day, it is your personal decision whether the debt consolidation is right for you or not, if yes than our credit card debt specialists are availaible to you for providing expert advice on how to pay off your credit card debt. Now that you have a fair knowledge of the pros and cons of debt consolidation, you can make decision on your own. All you need is to consider the above discussed information and you cannot go wrong.