If you are someone who has borrowed too much debt and is paying a high rate of interest, you are probably not in a good financial position. Apart from savings, having unpaid debts can lead to a bad credit score. Considering debt consolidation seems to be a great way out in such a situation.
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What is debt consolidation?
Debt consolidation is the procedure of merging two or more debts into one larger debt. Such loans are ideal for those who have to pay multiple high-interest loans.
For example, you have credit card loans, student loans, and auto loans. Instead of paying the interest on individual debts, you can pay one single amount each month for all your loans with debt consolidation. Besides making your credit management simpler, it also ensures flexible loan terms.
Difference between debt consolidation and debt settlement
Most individuals end up confusing debt consolidation with debt settlement. But, if you look closely, there are several differences between the two.
While debt consolidation is a type of debt relief from multiple debts, debt settlement is an agreement where your creditors agree to settle for a comparatively lower payable amount of what you’ve borrowed.
Debt consolidation offers you the security to pay back all your loans for one loan with higher interests. However, debt settlement doesn’t come with any such security. Your creditors can either agree or deny to allow you to pay lower than what you’ve borrowed.
To sum it up, debt consolidation is a comparatively better option than debt settlement. If you are in a dilemma, always treat debt settlement as the last option once you have exhausted all other options.
Reasons for consolidating your debts
If you have several debts, you must be dwindling between several credit options for loan repayment. We understand how confusing it can be to settle for one. Here are some reasons why debt consolidation can be your ideal option.
1. Saves you from penalties
Recurring non-payment of loans on time might lead to penalties. If your debt is bigger, the penalty charge will be relatively higher as well. With debt consolidation, you can repay your smaller loans instantly without the hassle of repayment.
2. Increases credit score
When you take several loans and fail to repay the interest on time, your credit score decreases. You’ll certainly not be able to avail any loan with a bad credit score. Thus, debt consolidation offers you the scope to repay your debts and improve your credit score.
3. Deals with repayment hassles
If you have multiple loans, repaying multiple creditors every month is indeed a hassle. However, with debt consolidation, you need to pay the interest to only one creditor every month.
4. Nominal interest rates
Compared to the higher interest rates you pay for auto and education loans, the interest rates are nominal for debt consolidation credits. Therefore, you end up saving a lot on the interest amounts in the longer run.
5. Flexible tenor options
Unlike other loans, debt consolidation loans come with flexible tenor options. Most lenders offer a flexible period of 12 months to 60 months to repay the loan.
Key benefits of debt consolidation
Now that you are aware of why you should avail of debt consolidation loans, check out how they can benefit you.
1. Simplifies your finances
Once you consolidate your debts, you’ll no longer need to worry about debt repayments and due dates every month. Besides, once you’re done repaying the multiple loans, think of the money you can set aside as savings.
2. Faster debt repayments
Opting for a debt consolidation puts you on the front line with faster debt repayments such as credit card loans. When you pay your debts quickly, you’ll be saving a considerable amount of interest rates.
3. Fixed repayment schedules
When you have multiple loans to pay, some unexpected schedule fluctuations might occur. While it does not seem much of a concern, continuous fluctuations will indeed affect your overall credit score. Debt consolidation loans require monthly payments, and thus you know how much is due every month on a scheduled day.
4. Lets you get lower interest rates
There are hardly any banks that offer you a credit card interest below 16%. Compared to it, any debt consolidation loan you go for wouldn’t charge more than the 11% rate of interest. So, going for a debt consolidation instead of continuing to use your credit card is always a great idea.
5. Boost credit score
A credit score is a significant concern for anyone who wishes to take loans in the future. But if you have multiple debts, taking your credit score above 750 can be quite a challenge. However, going for debt consolidation can not only help you increase your credit score but also aids your credit performance tracking metrics.
Should I consolidate my debt?
While for some, debt consolidation seems to be the ideal option, some might not at all benefit from it. It depends on the needs and ability of one individual to another individual and so on.
If you are already burdened with several debts, it’s better to consolidate your debts by taking a loan. On the other hand, if you only have a couple of personal loans to pay back or you’re close to your end-term, there’s no point burdening yourself with another loan.
However, you must look to improve your financial habits. If you continue with your old financial habits, you might find yourself in a debt trap sooner or later. Thus, if you are willing to make a positive financial change, debt consolidation is a good option for you.
Like every loan, debt consolidation has its perks and drawbacks. Make sure you understand the legal terms against which your lender is offering the loan and weigh your repayment chances. Though consolidating your debt might seem an instant relief, do not keep the issue that led to the loan unaddressed.