With people opting for different types of loans each day, it can be tough to manage monthly payments. The situation gets way more complicated when you have more than one credit card, because you will have multiple payments due each month. If you miss one payment or are late making one; it can adversely affect your credit score. It becomes increasingly problematic if you just make minimum payment amounts. Interest and financial charges will keep you in debt for years. In those types of situations, debt consolidation may be your only choice.
What is debt consolidation?
Debt consolidation is a type of debt refinancing in which you bundle all of your bills into one singular loan. This involves taking out one big loan to pay off a bunch of different debts. You can combine debts from several different creditors. The goal of debt consolidation is to pay off the entire balance owed at a lower interest rate over a longer period of time in one monthly payment.
Debt consolidation loans are often used to eliminate medical bills, payday loans, credit card debt, student loans, and high interest personal loans. They help to deal with overwhelming amounts of loans. Loans can be obtained from debt consolidation loan companies, peer-to-peer lenders, banks, and online loans.
Advantages of Debt Consolidation
Merge multiple payments into one
Rather than keeping track of different due dates and making a bunch of different payments; you can combine those payments into a single monthly payment. You are able to focus on one due date and make one monthly payment. This is much easier and helps you to manage your finances systematically.
Reduction of accrued interest and penalties
As mentioned earlier, only paying the minimum will lead to greater interest charges over time and cause you to rack up more debt. The greater the principal amount, the greater the interest charges. This means it will take you longer to get out of debt. Debt consolidation waives a part of the overall debt built up by interest and other financial charges.
Reduced interest rates
Debt consolidation will give you a lower interest rate with your creditors, so the monthly payments are significantly reduced as well. Lower interest rates will allow more of your monthly payment to go directly to principal enabling you to get out of debt faster.
Lower monthly payment
You will receive one monthly payment that is lower than all of your monthly bill payments combined.
Paves the way for a debt free life
Remember that becoming debt free doesn’t happen overnight. It can be a long and arduous process. You didn’t get into debt overnight so you probably won’t get out of debt overnight. However, a successful debt renegotiation can free you from debt within 2 to 4 years, while helping to save some money as well.
Say goodbye to collection calls
Debt consolidation can bring an end to harassing collection calls from collection companies demanding payment! Past due debts that have gone to collections will be included in your monthly loan payment amount. Creditors will begin receiving payments again allowing you to answer the phone again.
Late payments and charged-off accounts cause credit scores to plummet big time! Debt consolidation programs can help to rebuild the credit score for borrowers with high credit utilizations, large past due amounts or borrowers who are in default. Your credit score will rise as your accounts start to get paid off slowly.
While debt consolidation may seem like a cure to all of your financial problems, you need to be aware of the drawbacks as well.
Disadvantages of Debt Consolidation
Lower Credit Score
A debt consolidation loan can lower your credit score if you currently have a good credit score and are making payments as agreed. Some debt consolidation loans change the original payment terms agreed to and reduce the amount of principal you owe. Some companies may write off the amount forgiven as a bad debt expense or loan default which can cause your great credit score to take a hit.
Hard To Qualify
The people who would benefit from debt consolidation loans the most are often the ones who are least likely to qualify for them. Debt consolidation loan companies may require a credit score above 620 to provide unsecured loans to borrowers. Some of these companies will try to get you to offer you a secured loan to pay off your debts. Never take a secured loan for an unsecured debt! You will place your house, car, or boat in jeopardy. It is never worth risking your primary residence just so you pay off credit cards early
Debt consolidation loans are not free as companies charge fees to negotiate with your creditors on your behalf. These fees can be steep. Some companies charge thousands of dollars to get you lower loan payments. Find a company with low fees or negotiate with your creditor yourself.
- Always verify the credibility of the company before approaching them.
- They should be reputable and have been in the business for at least a few years.
- Research their reviews on Google and Yelp.
- Check their reputation with the Better Business Bureau.