We all want to get debt free but it is not easy as we have limited and fixed monthly income. If you are reeling under multiple debts, you need to take some immediate steps to cure your financial health. Debt consolidation is a good way to get rid of your debts. However, there are many misunderstandings about debt consolidation. Here are few things you should know about debt consolidation.
What is Debt Consolidation?
Debt consolidation refers to the refinancing of your debt in which you take a debt consolidation loan to pay off your other loans. Debt consolidation does not reduce the loan amount. You still owe the same amount. The only difference is the debt repayment becomes easier as you have only one loan to repay after opting for debt consolidation and you are given a longer repayment period.
What are the advantages of Debt Consolidation?
If you are able to curtail your monthly spending, a debt consolidation can help in:
Reducing your monthly payments
By spreading out the debt repayment period, a debt consolidation loan can reduce your monthly payments to a manageable level which takes off the repayment pressure to some extent. Also, people who have high debts are generally paying “minimum payment” towards their loans which do not reduce the debt. The minimum payment concept only covers the interest amount and you are not paying to reduce the principal amount. Without a debt consolidation loan, you might never pay your debts completely due to the high-interest rates.
Improving your credit score
Your credit score will improve if you are able to make regular payments of your debt consolidation loan since you have no other loans or do not accrue more debt.
Reducing the interest you pay
Credit card dues and some types of personal loans accrue high-interest rates. Debt consolidation loans generally have lower interests than credit card debt depending on the entity you engage with, thereby reducing the interest you pay.
Types of Debt Consolidation Loans
Home Equity Loans
Some licensed money lenders offer home equity loans where your house acts as collateral for the debt consolidation loan. Home equity loans generally have lower interest rates as the level of risk attached to the lender is lower. The drawback is that your home is on the line for your debt. If you are not able to pay your loan, you risk the foreclosure of your house.
Personal loans
If you are able to borrow a big amount for your personal loan, it can be used to repay multiple debts. Many legal money lenders will offer a large amount as a personal loan but the interest rates of such loans are a bit on the higher side. You can negotiate with the money lender to lower the rate which can be done by extending the loan repayment period
What is the right time to consider Debt Consolidation Loan?
If you are able to make only minimum payment for loans and feel the repayment of loans is becoming unmanageable, it is time to consider debt consolidation. However, you need to ensure you do not take any loans, including fast cash loans, after paying off other loans as it will make the debt consolidation repayment more difficult.