By now, at least once in your life, you have probably heard about debt consolidation. In fact, since you are reading this, you are most likely experiencing financial difficulties and probably carrying multiple debts. The truth is that many people are struggling with multiple debts and that tendency does not look like it is going to fade away anytime soon.
We live in a world where our regular monthly bills have gotten so expensive that even such bills can be enough to throw a person into debt. Therefore, it is no wonder that debt has become one of the main issues of the modern society. Since there are so many people in debt, are there any solution to that problem? The answer to that questions is yes, there are. However, much like with most things in life, it is one thing to know the solution to a problem, it is a whole different thing to execute it and reach the desired goal.
With that being said, it all starts with having information. The more information you have about certain issues, the better your chances are to resolving it. And so, in case you are exhausted from dealing with multiple debt bills every single month, and you want to go back to living a normal life, this article will provide you with some pretty useful information. Unless you are ready to start taking action and commit to your goals, this information will be nothing more than words on paper.
Explaining debt consolidation
Even though so many people struggle with multiple debts, not all of them are actually aware what debt consolidation actually is. So by definition, debt consolidation is the process of combining multiple debts into a single monthly payment.
There are different types of debt consolidation. There is a debt consolidation type where the debts are shuffled into a brand new loan. Your debts are combined into a single monthly payment. As with most things, different debt consolidation types will work better for people with different needs and specific financial situations.
Each person’s situation is unique and so you need to understand what your specific situation requires and make your choice based around that. With that being said, there is a certain debt consolidation type that attracts the attention of many people with multiple debts, especially unsecured ones, and that is called debt consolidation loans.
So what is a debt consolidation loan?
Taking out a debt consolidation loan will allow you to combine all of your current debts into a single, brand new, larger loan. That way, instead of having to make a number of different payments with different amounts, to multiple loan lenders each month, your single debt consolidation loan monthly payment will cover all of your debt payments. That, of course, makes debt consolidation loans quite useful for better managing debts. However, you need to be aware that sometimes, debt consolidation loans have really high interest rates, and that is something that cannot be ignored and should not be overlooked.
How does it work?
What you do by using a debt consolidation loan as your option of choice for dealing with multiple debt is shuffle all your existing debts into a single larger loan. Once you do that, you will be able to close down your credit cards, as well as the different loan arrangements that you previously had, and continue to repay all your debts by simply making your debt consolidation loan monthly payment.
As we have already mentioned above, you will only need to think about a single monthly payment instead of having to keep track of multiple bills every single month. The majority of debt consolidation loans are unsecured loans. That means that the loan lending company cannot have a claim for any of your property in case you are not able to keep up with your monthly repayments. That, however, does not mean that you can relax and care a bit less about your debt repayments as the lender may still be able to get what is owed to him by taking things to court.
If you are taking out a secured debt consolidation loan, you need to be really careful. Taking such loan means that the money that you owe will be held against the property that you have used as collateral for the loan. Such property can be your house, car, or any other property of value that you might have. By using your home as a collateral for the loan, in case you fail to make your payments on time, you will be putting your house at risk. So only take out a secured loan if you are absolutely sure that you would be able to make your monthly payments on time. On the positive side, by using your property as a collateral for your debt consolidation loan, you may be able to secure better loan terms, including a lower interest rate.
Debt consolidation loans pros and cons
Debt consolidation loan benefits:
You will only have to pay a single monthly bill, which means that you would be able to focus on just one payment which is a lot easier than having to keep track of multiple loan repayments each month.
- By having just a single monthly bill to take care off, you will have more free time that you could use for the other important things in your life.
- There is a chance that a debt consolidation loan might have a positive impact on the state of your credit score. By consolidating your debts and closing multiple loan accounts, the loan lenders will notice that you are taking your debt repayments seriously which can ultimately improve your credit score.
- A debt consolidation loan may come with a lower interest rate compared to the overall interest that you were paying for all your debts. That is, of course, in case you have a good credit score that can allow you to qualify for such debt consolidation loan terms.
Debt consolidation loans cons:
- By taking out a debt consolidation loan, you may find yourself paying a higher interest rate. That is very likely to happen in case you have a bad credit score. Usually, if you have a bad credit score, it is pretty hard to qualify or a debt consolidation loan in the first place. However, if you manage to qualify, you are probably going to have a higher interest rate on your loan.
- There are some loan lending companies that may charge you with a fee if you want to repay your loan earlier than scheduled. In order to see if your loan contract has any early repayment fees, you would need to carefully read everything written on that contract.
- Even though a debt consolidation loan may secure you an overall lower monthly payment that may come with the price of a longer repayment period. While that may help you manage your monthly budget, you will most likely pay a bigger amount of money in the long run.