You may be in a mountain of debt, and you’re wondering if there’s any option to pay your loans as quickly and easily as possible. Then someone may have told you to participate in a debt consolidation program, and you have no idea what it is. Great news! By the end of this article, you’ll answer the most common question about it: why is it best to consolidate your debt?
What Is Debt Consolidation, by the Way?
As its name suggests, debt consolidation is about grouping together your debts and taking up a whole new loan. To be more specific, imagine you have Debt A ($10,000) and Debt B ($5,000). When you consolidate, you apply for a loan worth $15,000 to close all your existing debts and focus on paying $15,000 from hereon.
Debt consolidation is different from home refinancing, which spares you from applying a new mortgage to take advantage of a better interest rate and payment term. It is also not debt restructuring, where you negotiate your repayments, making them more affordable and manageable. Debt consolidation, therefore, is an entirely new species with its set of benefits.
Why Is It Best to Consolidate Your Debt? Find Out!
With debt consolidation, you can:
· Maximize the value of your existing assets – You can take up a loan against your home equity, life insurance policy, and the trade-in value of your vehicle. With these secured loans, are you’re more likely to enjoy better payment terms.
· Take advantage of a better interest rate – A huge bulk of what you pay to the lender is actually your interest repayments, and the longer the debt is, the more interest you pay. When you consolidate your loans, you now have the opportunity to get a new one with a lower interest than that of the existing debts.
Take note, though, many factors can affect the total interest you pay. One of these is your credit score. If you have a good score – say, at least 700 – you can negotiate for a better rate. You can also choose a fixed interest rate to help you manage your finances more effectively. However, fixed interest rates are usually available for short-term loans, such as 6 months to 1 year.
If you want a much longer payment term, you can apply for a variable interest, but this can be risky if the market interest goes up.
· Manage repayments more efficiently – Late repayments can have a severe impact on your finances. They can increase your total debt repayment due to fines or charges, as well as potentially bring down your credit score.
While there are many reasons why you cannot manage debts well, one of these is there are too many to think about. With debt consolidation, you have only one loan to consider.
So why is it best to consolidate your debt? Debt consolidation is not a perfect debt management program, and it suits only certain types of people such as those with only a few repayments to make. Moreover, it doesn’t take away debt entirely – you’re just getting a new one. Nevertheless, there’s a good chance the benefits outweigh the disadvantages, so it’s still worth considering.
According to Debt Consolication Programs experts, recognizing the problem is the first crucial step to take. Let us explain to you why is it best to consolidate your debt.