What is debt consolidation?
If you are thinking about how debt consolidation works or how debt consolidation works, you have landed on the right article. Today, we will discuss various aspects of debt consolidation and also find out how it can be useful to you.
It’s a 3-minute read article. If you’re in debt, I’m sure you can spare 3 minutes from your busy schedule to know if debt consolidation is good for you. So here we go.
What is debt consolidation?
Debt consolidation is the process of combining all your unsecured debts into a single monthly payment. There are many ways to consolidate your debt, and that is considered to be beneficial to those whose financial conditions are bad and have multiple high-interest debts to pay off.
How does debt consolidation work?
Dealing with multiple unsecured debts with different due dates is tough. You have to handle so many things – minimum balance, penalties, and late fees. Just when you have paid one bill, another one pops up. Debt consolidation helps you consolidate your loans into one bill with a single due date and a fixed interest rate. The new interest rate is usually lower than what you’re paying right now. So it becomes easier for you to simplify your financial life.
Here’s how debt consolidation works in 6 simple steps in the case of a program:
Step 1: You sign-up with a debt consolidation program and list all your unsecured debts.
Step 2: The debt consolidation company evaluates various components of your financial life:
- Your income
- Your expenses
- Your savings
- Your debts
Step 3: The debt counselors talk with you about your affordability and then negotiate with creditors for a new repayment plan where you have to pay a low-interest rate.
Step 4: The negotiation process continues.
Step 5: Debt counselors and your creditors reach an agreement and finalize a new repayment plan for you.
Step 6: Success! Finally, consolidate your loans into a single monthly payment plan. You make payments to creditors until all your bills are repaid.
3 Basic ways to consolidate debts
1. Use the balance transfer method
When you have multiple credit card debts to repay, it can be very difficult to make the payments and move ahead in a positive direction.
One way to resolve this issue is to transfer the balance on your existing credit card to another account. For your benefit, a lot of credit card companies promote their low-interest rates between 0% – 5% usually for the first 3 – 18 months. This can be of great help if you can pay off the entire balance within the introductory rate period.
2. Use the debt consolidation program
Enrolling yourself in a debt consolidation program is an option for you to get debt relief. In simple words, it is all about combining all your debts and putting them into one big payment plan.
3. Use the consolidation loan option
When you opt for this option, you can select the amount you need to take out and the repayment term that seems best for you. You can borrow up to a set amount with a personal loan or with a home equity loan. Once the loan application is approved, the new loan can be paid off by making monthly payments according to the repayment term.
Why should you consolidate debts?
The prime reason can be it’s always better to have a single monthly payment instead of paying to several accounts. With this as the focal point of action, consolidation could be a good choice as it can reduce monthly payments and usually secure a lower overall interest rate.
There’s also a catch in the debt consolidation process. Please be aware that along with savings, potential costs are also involved. This will vary depending on how you choose to consolidate your debt.
You may have to pay lender fees when opting for a new loan like taking out a personal loan or looking to refinance your home loan to consolidate debts. Along with that, government charges and taxes may apply if you use your home loan to consolidate debts.
Likewise, you usually need to pay balance transfer fees when you opt for the balance transfer method and professional fees when enrolling in a consolidation program.
So by now, you must have understood why debt consolidation can be essential for you. Let’s discuss a few more points.
How can debt consolidation be useful to you?
As already mentioned, apart from combining your multiple debts into a single monthly payment, here are some more advantages
a. Manage your debts more easily
You can easily manage your payments and in a more convenient way than juggling several kinds of debts. You will have less hassle while dealing with paperwork as you get to receive only one set of statements, and of course, you have the advantage of dealing with a single point of contact with a single lender with a
b. Simplify your debt repayment process
Debt consolidation could also make it simple for you to plan your budget since you know the fixed monthly payment you need to make. Instead of managing several separate repayments at various times of the month, you will only have to make a single monthly payment.
c. Save money as you consolidate it
By consolidating your debt at a low-interest rate, you can enjoy huge savings on monthly payments and cut across hundreds or even thousands of dollars from your total interest bill.
d. Save on ongoing fees
You can also save money on late payment penalties and fees when you try to repay debts with the help of a consolidation
e. Lowers your interest rates
If your interest rate and monthly repayments are reduced, debt consolidation may help you become debt-free sooner.
What are the pitfalls?
More and more people have pertinent questions to ask regarding debt consolidation programs, loans, and types. Is debt consolidation a good idea? Is debt consolidation bad for your credit? To properly get answers to the questions, have a look at its disadvantages as well. It can help you make your decision.
1. It can be misleading
The flaw in debt consolidation is that it can fool you and give rise to unhealthy financial habits. When people think of consolidating debts, they often feel good about themselves and their finances. They think that their interest rates would reduce and that monthly payments would be very easy to manage. By thinking so, many people overspend and incur debt.
Instead of properly planning their budget, the financial situation can be worsened by continual spending.
In the long run, it can only put you in a bad financial condition because of your added credit usage.
2. It can cost you a lot
If you are taking out a home equity loan to consolidate debt, it may seem like a great idea, but if you do not meet your payments, your house can be taken away. With secured debt, you will always be tense about what will happen if you are unable to repay the debt. On the other hand, with unsecured debt, such as a credit card, the worst that can happen is your rating and score may get dropped.
3. It doesn’t take you out of debt
Debt consolidation is not an ideal option if you want to fully get rid of debts. Having just one single payment to manage every month, you can think that you can easily get rid of debts. However, you may be tempted to use credit cards again after the previous debts are paid off.
So, it depends on you whether debt consolidation can be beneficial or harmful to you. Think carefully and decide!
4 Factors to check before you consolidate debt
Is debt consolidation good for me? If this question is coming into your mind several times in a day, then here are a few factors you need to check beforehand.
- 1. Your overall debt amount: How much do you owe in total? Calculate your total outstanding balance for each debt. Add late fees and fines to your final calculation.
- 2. Type of debt you have: You can’t consolidate all debts. You only have to choose unsecured debts for debt consolidation.
- 3. How much you have to pay: The tenure of the program matters a lot. The longer you play, the more interest you have to pay in total.
- 4. New interest rate: How much interest rate do you have to pay after consolidating debts? Calculate that first and figure out if you can pay the new interest rate. Is it more than what you’re paying now? If so, then you shouldn’t consolidate all debts right now.
Can debt consolidation be useful when you have bad credit?
Yes. It can be useful when you consolidate debt with a program. You don’t need a good credit score to qualify for a debt consolidation program. However, in the case of a debt consolidation loan, you need to have a good credit score. Otherwise, you would have to pay a high-interest rate on the debt consolidation loan. If you have tangible assets and you can pledge them as security against the loan, then you may qualify for a debt consolidation loan at a low-interest rate.
The third way to consolidate debt is through balance transfer credit cards. In that case, also, you can’t qualify for a good balance transfer credit card without a good credit score. If you have bad credit, then enroll in a debt consolidation program without any delay. That’s the best way to consolidate debt.
Is online debt consolidation equally useful for you?
Online debt consolidation services make the consolidation process simple and user-friendly. You can enroll in the debt consolidation program within a few clicks. You can get free counseling over the phone, sign all the papers online, and list all your debts in a virtual portal. You can check the status of all of your accounts 24*7 after joining the consolidation program. There is no need to go anywhere. You won’t lose any time.