When you find it hard to keep track of all your loans, there is a solution called debt consolidation. Debt consolidation allows you take another loan that then gets used to pay off other loans. In other words, by using debt consolidation loan, you can bring all of your debts into a single combined loan, which means that you are consolidating them. Hence, the consolidation debt term. Although this type of loan can certainly improve your finances, it isn’t necessarily a blanket solution for all of your financial problems. That’s why before even considering whether you want to apply for this type of loan you need to be aware of the few facts. Here are a few things you need to know before you sign up.
What is debt consolidation
There are a few things debt consolidation helps you to solve:
It lowers your interest rates. A good debt consolidation loan has lower interest rates than the credit cards you are consolidating, which may save you a lot of money in the long run.
The lower interest rate you would get on your debt consolidation loan will also lower your monthly payment, which will then enable you to keep track of your finances more easily.
Finally, a debt consolidation loan gives you the ability to manage your bill payments more easily. If you consolidate your debts, it won’t be so difficult to juggle all the payments because you reduce the number of bills you have to just one.
Different ways to consolidate debt
Here are some of the most common ways people go about doing debt consolidation loans:
- The line of credit – If a bank or a credit union can approve you for a line of credit, you can use this to consolidate your debt. One of the disadvantages of this method is that you have to be very disciplined when it comes to paying set amount each month. Otherwise, it can take decades to pay off the loan.
- Credit card balance transfer – one of the ways you can consolidate your debt is through low-interest rate balance transfers that banks usually offer as an option. The downside of it is that you need to make sure you pay off your balance by the end of the low-interest promotional period. Otherwise, you end up having to pay normal credit card interest rates amount to 20 %.
- Home equity loan – equity is the amount of money you own after you withdraw your mortgage from the value of your home. If you have a good equity, this could be a good option because it offers the lowest interest rates when done through a normal bank or credit card union.
- Debt consolidation loan through a finance company -finance companies don’t have such strict lending criteria like banks. However, their interest rates can be up to 47 %.
- Debt repayment program – if you are struggling to make minimum payments and don’t qualify for debt consolidation loan, you can always choose a debt repayment program. This program eliminates interest, and consolidate debt payment into one affordable monthly payment. This enables you to clear your debt in 5 years.
When is a debt consolidation loan a good idea?
A debt consolidation loan is not an ideal solution for everybody. Here are a few things you need to know if you want your consolidation strategy to become a success:
-Your cash flow consistently covers payments toward your debt
– Your total debt is not bigger than 50% of your income
– You have a plan to prevent running up debt again
In case you are an excessive spender who has a problem managing your finances, then consolidation strategy is not a good idea.
The downside of debt consolidation loan
In a way, debt consolidation process is shifting your debt than taking some serious steps how to get rid of it. From a spending problem and unexpected emergency to unrealistic budget and income issues, there are many reasons people eventually end up with a debt. While consolidation strategy will allow you to pay off your credit cards, it will also free up spending money on them. You need to be disciplined enough not to spend that money all over again because you will end up in a far worse position. Also, if you are consolidating using the equity in your home as a security, there is a possibility that your home may decrease in value leaving you with loans that are worth more than your home.