When it comes to addressing your debt, there are several strategies you can adopt. One of them is debt consolidation. Have you ever heard of the word debt consolidation? Do you know what it means? How can it be of help to you in the future? Is it really good to consolidate debt? If yes, what type of debt consolidation are you considering? How does debt consolidation even work?. If you are to consolidate your debts and you need a bigger loan, do you need other tips to find the best loan rates in the USA. If you need accurate answers to all these questions, then keep reading. First of all, what is debt consolidation?
Debt consolidation is used to pay off a series of small loans by getting bigger loan offers. It is a form of loan repayment that entails getting another huge loan to pay off many other small loans. It can also refer to a country's fiscal approach to consolidate government debts.
Debt consolidation stack up multiple high-interest debts such as credit card bills, personal loans, student loans into a single payment which is paid off by taking out a new big loan.
Why Should You Consolidate Your Debts?
Making the bold decision to consolidate your debts enables you to combine a series of debts into a single payment. This in turn simplifies your debt management and gives you peace of mind on your finances. Debt consolidation also enables lower interest rates on your debts and this will serve as a long-term benefit.
For instance, when the interest rate on your debt is lowered, you pay off your debts sooner and this allows you to save more money.
Consolidating your debt is a good idea, especially if you have a good credit score, having a good credit score will make you qualify for the best interest rate possible.
Some people have a series of debts such as student loan debt, high-interest credit cards, personal loan debt, bad credit loans, and so on. If you are part of this set of people, then debt consolidation is your best way out of it. As earlier stated, debt consolidation will lower debt interest rates but even at that, it has its advantages and disadvantages.
Below are the advantages of debt consolidation
It lowers the interest rate on your debts:
This is the biggest benefit of debt consolidation, you pay off your debts at a rate lower than the initial rate. This will enable two benefits; paying off your debts sooner rather than the initial time, also you will be able to save more money.
Your debts will be combined into a single payment:
Debt consolidation saves you the stress of keeping track of a series of monthly debt payments and multiple interest rates by combining all your debt into one payment with a single fixed interest rate. This arrangement won't change until you pay off that particular debt. Apart from helping you to simplify your debts, debt consolidation will give you a clear-cut plan that will work you through the journey of being debt-free, especially when you don't have an escape plan from debt.
Since you already combined all your debts into one payment, there will be no calls or messages from different creditors and loan companies, thereby protecting your mental space and giving you peace of mind.
Debt consolidation also allows you to have a clear vision and plan of how long you need to pay your debt (probably within 4 or 5 years)
Here are a few disadvantages of debt consolidation
Often, the interest rate for personal loans is higher than credit cards. From a previous average of 15%, it may increase to an average of 25% per year. So, before deciding whether to consolidate your debts, examine and compare the interest rates.
Debt consolidation is only a temporary solution for your debt woes. It will not solve your debt issues if you refuse to address your main reason for taking that loan in the first place and running into debt. Though consolidation is a helpful tool, it isn’t a sure fix for recurring debt and doesn’t address the behaviors that led to debt in the first place. Debt consolidation only works for people who took a loan to attend to an important issue which they will never borrow money to do again. e.g, emergency expenses, hospital bills, unavoidable home renovation, etc.
Debt consolidation only works for people who are disciplined and determined to be free from debt and won't borrow more money until they pay off the existing debt. If you take a debt consolidation loan while borrowing other money somewhere else, debt consolidation can not solve your debt problems.
In conclusion, debt consolidation has advantages and disadvantages. If you are experiencing debt problems and it seems to be going out of hand, and affecting other areas of your life, debt consolidation may be your best option.
However, you need to compare the pros and cons, check the rates, the time of repayment, before you select the best solution for yourself. Whichever way, the best way to deal with debt is saving.