Now that debt is turning into the biggest and most common financial issue for many people around the world, a lot of questions regarding how to get rid of debt start to pop up. And though you may find different methods and financial tools that can help you repay your debt, when you are struggling with more than just a single debt, there is a method that can definitely be used method for dealing with multiple debts. That is debt consolidation. Before we dive into what debt consolidation is and how to consolidate your debts, it is important to have a basic understanding of what debt is, and the reasons why many people are struggling with it.
What is debt?
Simply put, debt is an amount of money, goods, or services that you owe to a person or a financial institution. The one who owes the money is called a debtor and the one to whom the money is owed to is called a creditor.
What types of debt are there?
There are many different types of debt. They all have one thing in common: unless you repay them, nothing good will come out of it. Some of the most common debt types include student loan debts, credit card debt, mortgage debt and car loan debt. Regardless of the type of debt you are carrying, unless you find a way to get rid of that debt, you are only going to fall deeper into debt. Now let’s talk about how you can get rid of your debt.
How to pay off debt?
As we have already mentioned above, there are different ways of dealing with debt as every person’s situation is different and unique. Based on your specific financial situation, you may find a certain debt repayment method better than another. However, in case you are dealing with multiple debts, your best option would probably be to consolidate them.
What is debt consolidation?
There are different types of debt consolidation but they all share a similar process. The idea of debt consolidation is for you to combine all of your current debt bills into a single monthly payment. The purpose of this is for you to be able to repay your debt faster and easier by lowering your interest rate and reducing your monthly payment. Although debt consolidation is not a bulletproof method for paying off debt, it is definitely worth the consideration. When a debt consolidation is done properly according to your specific financial situation, the benefits can be quite good. However, in order for your debt consolidation to work, you would need to understand that debt consolidation is not some magic trick or instant financial fix. Do not expect to suddenly be free from all your debts after you consolidate them. As with most things in life, if you want your debt consolidation to get you the desired results, you would need to fully dedicate yourself to reaching your goals. With that being said, it is important to know what you can get out of consolidating your debts.
Benefits of debt consolidation
If done properly, debt consolidation can really have a massive positive impact on your financial life. Here are some of the most important benefits that you can get by consolidating your debts:
Single monthly payment
Yes, you already know about that one, but it is worth mentioning again as it is one of the main features of debt consolidation. It is actually one of the biggest advantages you could get in your battle with multiple debts. By shuffling all your existing debts into a single monthly payment, you will be able to keep track of that payment a lot easier compared to all the different bills you would have to focus on if you do not consolidate your debts. Being able to turn your attention to a single bill each month frees up enough of your time so that you would be able to manage more easily your other bills and everyday life tasks. Having a single monthly payment will also minimize the risks of having a late payment. Therefore, it will save you the money that you would otherwise pay for fees.
New payment = new interest rate
If you have a good credit score, then your chances of qualifying for a debt consolidation with lower interest rate are going to be pretty high. By getting a lower interest rate on your new monthly payment, you would be able to save a significant amount of money over the whole debt repayment period. Qualifying for a lower interest rate can dramatically change the state of your financial stability as you would be able to afford to repay your debts while also managing your regular monthly bills a lot easier. In case you have a poor credit score, it is going to be quite difficult to qualify for a debt consolidation loan with a lower interest rate. However, nowadays, there are numerous private loan lending companies that offer debt consolidation and so even if your credit score is not that great, you still t have a chance at qualifying for a lower interest rate debt consolidation loan.
Reduced monthly payment
When you consolidate your debts, you would most likely be able to reduce your overall monthly payment. Reducing your payment will get some of the pressure off of your chest as you will have some extra money to use for your other needs.
How to consolidate debt
There are several different ways for consolidating debt. We are going to focus mainly on two debt consolidation methods – debt management plans and debt consolidation loans.
Debt management plans
There are financial specialists who claim that debt management plans are the best way for consolidating debt. Debt management plans that are most commonly recommended are offered by non-profit organizations. Debt management plans usually start with a session, with a credit counselor. The point of that meeting is for the credit counselor to help you find out how big of an amount you would be able to afford to put towards debt repayments every month. The organization may be able to help you to get better terms on your debts, including lower interest rate and reduced monthly payment.
Debt consolidation loans
Debt consolidation loans are arguably the most used method for consolidating debt. A debt consolidation loan is a single, large loan that is a combination of all of your existing debts. By consolidating your multiple debts with a debt consolidation loan, you will not only get a single monthly loan payment instead of paying all your debts separately, but you will also get new terms on your debt consolidation loan. That means, that if you have a good credit score, you would probably be able to secure a loan with much better loan terms, including fees and interest rate. In addition to that, your monthly payment for your debt consolidation loan would probably be less than the overall amount of your multiple debts monthly payments. You just need to keep in mind that sometimes a lower monthly payment means a longer loan repayment period. That can ultimately cost you more money in the long run.