Important Facts You Never Knew About Debt Consolidation

Debt Consolidation

Importance of debt consolidation

Having to pay many debts at once is a delicate balancing act; it can be likened to juggling, where you have little control of what happens. The interest rates on these loans are varied and may cause you to pay large sums of money at the end of each month to settle them. The risk of default is high if the payments make for a large chunk of your monthly income. This will not only affect your credit rating but also put your collateral at risk. Luckily, however, debt consolidation provides a way to get over these hurdles. Using a free debt calculator will help you ascertain the amount of money needed to consolidate the debt.

What is debt consolidation?

Debt consolidation, also called credit card consolidation, is taking credit to pay off another credit.  This new loan is at a lower interest rate and you will have to pay a much lower amount in monthly instalments. It reduces the amount of paperwork as you will only have a single monthly payment to make. You get to reduce the cost of debt in the long run and get peace of mind. The simplicity of the payments and the smaller payments are the real attractions to debt consolidation.

The avenues for debt consolidation

You can merge your debts by taking a mortgage. A mortgage has low interest rates compared to other forms of financing. Their instalments are manageable and can be drawn to fit your monthly income. The downside of mortgages is that the longevity of the payment period may make you pay much more in interest costs. They are useful for paying short-term debts that have very high interest rates and instalments.

You can also take a bank loan. Taking this personal loan can be used to offset higher interest credit card debts. They can be used to pay for a pool of debts and reduce the amount of taxes charged on each instalment. They are easier to budget for as they come with a definite payment plan and time.

You can also pursue credit card balance transfers as an option for debt consolidation. Putting all your debts in a credit card that has a low interest rate means you get to make savings on monthly bills and have a bigger margin of cash for other uses. Another option is using an unsecured loan such as peer-to-peer loans. Debt reviews can help you with that decision.

Advantages of debt consolidation

The ultimate goal of debt consolidation is to enable you to make repayment of your debts quickly and make the process of payment manageable. One loan is easier to service. Hence, you can make savings on interest charges. Reduced monthly instalments make the burden of owing debt manageable for low income earners. It also reduces the risk of spoiling your credit rating because of reduced risk of default. You get to pay your loans faster and avoid credit damage.

Disadvantages of debt consolidation

The main problem of debt consolidation is the elongated payment period. Lower instalments and interest rates make for a longer payment period. You may also incur charges and taxes in getting the new loan. The other major risk is that if it backfires, you will have plunged yourself deeper into debt.

The best way to execute a debt consolidation is by consulting a skilled financial advisor to analyse your debt situation and advise you on the best plan going forth.