The Advantages of Debt Consolidation
If you have several debts to different institutions or on different credit cards, you may be able to consolidate your debt. Debt consolidation means taking out one large loan and using it to repay all your smaller debts. This way, you can satisfy various creditors and streamline your financial management by only having one debt repayment per month. This kind of plan needs to be carefully managed, but there are several advantages. Continue below to read about the advantage of debt consolidation.
Having many different payments to manage each month can be difficult and stressful. You may even lose track of what you should be paying and when, finding yourself caught off guard. One large payment to manage each month can make money management far simpler. You know how much you will be paying, and the date on which each payment is owed, and you can plan the rest of your month’s budget accordingly. Depending on the options available to you, you may be able to find a loan with a lower minimum payment than you had previously been paying.
A single payment also means that you might find it easier to make the payments on time each month, reducing the chance of paying late fees. You might even be able to set up an automated payment if you are confident that you will have the money in your account at the same time each month.
Lower Interest Rate
It can be possible to find a consolidation option that saves you money on interest. The interest rate of the loan, itself, could be higher than any one of your individual loans. However, the combined interest on several smaller debts could amount to far more than you realize. It is best to calculate what you are paying in interest across all your debts before consolidation so you know if you are getting a good deal.
You may be able to find a lower insurance rate for a home equity loan or another asset-secured loan. Of course, you should be certain that you are able to take the risk. An unsecured loan will be less of a risk, but will likely have a higher interest rate. Another option is a balance transfer between credit cards. You may be able to open a new credit card that has a special interest rate as a starting promotion. Some even offer zero percent interest for the first year.
With a large, consolidated loan, you may be able to extend the payment period further than any of your smaller ones. As a result, you have a smaller payment each month. The extended length of time means that you may end up paying more interest overall, which should be considered. However, lower monthly payments mean they are easier to meet, so you are less likely to incur any late fees.
Multiple credit card debts obviously hurt your credit score, and paying them off can improve it drastically. Of course, taking out a new loan or transferring your balance to a new credit card could hurt your credit score, initially. However, by creating an easier repayment plan, you may increase your chances of meeting the payments of the new loan. If you manage to meet these payments regularly, you can prevent any further damage to your credit score.
You can also prevent loss of credit points by making sure that your debt consolidation plan does not involve closing your previous credit accounts. Of course, it is vital not to immediately get back into debt on your credit cards as soon as they have been paid off.
Keeping track of multiple charges, payments and interest rates can be extremely stressful. This stress and anxiety can be compounded if you have been receiving calls and letters from your bank or a debt-collection agency. It may seem like this should motivate you to pay your debts quickly, but it can have the opposite effect. Many people find it difficult to try and deal with payments or budgeting when these activities are causing them extreme anxiety. This can result in procrastination or even “stress-shopping,” making the matter that much worse. Taking control and adopting an active debt-solving strategy can help you improve your spending habits and overall financial health.
The process of consolidation does not need to be complicated. There are debt counselors that can help you – some are even available to chat to online. Your bank may also be able to aid in deciding which options are right for you in terms of loans, security and repayment plans. A clear plan can mean you are that much likelier to meet your goals and to get out of debt.