The current economy forces people to rely on loans more and more these days. It is common for a person to have more than one debt. Multiple loans bring complications. Unexpected medical expenses, home emergencies and tuition payments would make you add more credit to your personal account and your finances could be seriously shaken by repaying all of them. Different loans from different lenders usually may result in paying numerous installments per week or month, where the ones taken due to urgency are known to be most expensive in view of interest rate.
Debt Consolidation as a solution to multiple payments
Debt consolidation could be a solution. Basically, debt consolidation means that you take out a new loan but the purpose of it is to repay all your other existing loans. It combines your current debts and the sum of that loan covers what you owe, where after that you should pay off only your last lender. The process of combining aims at receiving better terms, such as lower interest rate and, of course, having one debtor instead of several ones. The one single payment installment per period could ease up your situation significantly. Still, a couple of things should be carefully considered before seeking debt consolidation.
You should keep in mind that debt consolidation target is to release the stress of multiple creditors and installments. Also, it is designed to help you manage your personal credit score, decrease your monthly expenses and increase your cashflow.
How to decide if you need debt consolidation?
A couple of steps may help you decide whether you should seek debt consolidation. They would shed some light on your finances and once you have a clear view of how much you are paying at the moment, you would be able to consider consolidation.
First, it is recommended to make a list of all your outstanding debts. Include everything – credit cards, payday loans, car loans, mortgage. Be sure to write down the interest rate of each loan, the maturity date payment due date, as well as the total amount you should be paying in return. Then review them and separate the unsecured ones. Typically, they would be the credit cards debts, payday loans and any other small consumer loans. Mortgage is a secured payment. Calculate what you must pay for a month for these debts and deduct it from your net income. If the sum is too overwhelming for your pocket, perhaps debt consolidation would work for you.
You may decide to leave the affordable payments out of the picture and that would be fine. The most expensive and unsecured ones are the first ones you should look to consolidate. If your credit score allows you to, you may apply with a bank for a loan to cover all your debts. As payday loans are known to have higher interest rates, they would be a good starting point.
Explore your options
Once you decide to pursue debt consolidation, you should explore as many options as possible. Banks and financial organization may differ in their offers but your prime target should be to find the best interest rate to pay for that single installment. Another thing to be cautious about is the term of that new loan. A longer term of repayment means smaller amounts to pay on a monthly basis but in the long run, you would be paying a lot more to repay that debt.
What you should keep in mind
Debt consolidation is not a miraculous option to erase or decrease your debts. It is a financial instrument to help you better manage your credit and put your finances back in order. If you have too many payday loans and credit cards that may be a bit harder than expected. It is usually a signal to the lender you are not very reliable debtor and you may not be able to cope with your new payment. So, if you are already stretching your income and barely making the minimum payments on time, this new loan you are applying for should be tailored in a way to provide you relief rather than become an unaffordable burden.
Costs and procedure
Consolidation loans may be costly too. You should be informed of how much you should spare to afford that new loan, what are the applicable fees of your new lender, are there any benefits for early repayment, are there other options in cases of emergency.
The documents you should prepare are the typical ones for all kinds of loans. Only this time you may be required to provide your own information for your credit cards bills, payday loan agreements and payment plans and others at the discretion of your potential new creditor. The information will be verified and your credit score will be checked.
Debt consolidation purpose
Remember that when undertaking steps to obtain a consolidation loan, your goal is to reduce your monthly (or periodical) payments, get less expensive interest rate and to be able to repay the debt consolidation in the foreseeable future without ending up broke. Debt consolidation may be the wise thing to do to help yourself but it has the potential to evolve into a bad situation. A financial consultant may assist you and properly plan for debt consolidation.