When you talk about debt consolidation, the important things we must know are the advantages and disadvantages before you apply for new debt.
What are the advantages?
According to Latoya Irby, as stated at https://www.thebalance.com there are three advantages of debt consolidation loans, as follows:
- Lower monthly payments
For payments over a longer period of time, debt consolidation usually makes lower monthly payments, which in turn can help ease your tight budget.
- Low-interest rates
With debt consolidation, you should aim for a loan or credit card with low-interest rates. Lower interest means lower overall debt costs.
- Easier to manage debt
After consolidating your debt, you only have a single debt payment. That means you do not have to worry about the number of billing reports, payment amounts, and due dates. Managing a single debt will certainly ease your debt burden.
What are the disadvantages?
What you rarely hear about are the disadvantages of debt consolidation. Depending on the terms of your new loan, it’s possible you can actually end up paying more in interest over the life of the loan, or that you’ll end up more deeply in debt.
Latoya Irby mentioned three disadvantages of debt consolidation, namely:
1. Your home is at risk
When you secure your debt with a mortgage or a home equity loan, you risk asset seizures if you are late or stalled in paying the debt installment.
2. The high cost of debt
On the one hand prolonging the installment period of debt can indeed lower your payments, but on the other hand, it will increase the cost of debt.
3. You may need a co-signer
If your credit score has been reduced due to late payment of debt, you will have difficulty finding people who are willing to co-signer the loan for you.
How Does A Debt Consolidation Loan Work?
If your debt consolidation loan application is approved then you must meet certain risk criteria. Your credit provider will pay off your loan and withdraw collective debt into a single, larger loan. This makes payment easier while saving money for administrative costs.
Debt consolidation loans also usually have a longer loan period than regular loans that make your monthly installments go down and more affordable. However, it also makes your debt more expensive in the long run because it increases the amount of interest. For that, you must try to pay off the debt as quickly as possible. Moreover, if you initially use a debt consolidation loan to make monthly payments more affordable.
Is Debt Consolidation The Right Choice?
Next question is whether debt consolidation is the right choice for me? If you are struggling to maintain your finances, debt consolidation loans can help, but try following these five guidelines to see if debt consolidation is the right choice for you. Taken from https://www.bnz.co.nz, there are five questions to answer to see if debt consolidation fits and be the right choice?
1. What is a debt consolidation loan?
Debt consolidation is a fairly simple process that moves many sources of debt into a single loan for easy management. With one payment source every month or two weeks, lets you save money. Usually, the monthly repayments on a single, larger loan will be less than many smaller loans.
Try calculating mathematically and being realistic whether a debt consolidation loan can work or not. The debt will be more easily paid with a single payment every month. However, make sure you can pay the new installment amount.
- Is there anything special about a debt consolidation loan?
A debt consolidation loan is just a big new loan to cover a lot of smaller debt sources. The new money from debt consolidation is then used to pay off all small debts and you start paying new installments. Like other types of loans, no one can guarantee your application is approved, so you need to talk to the bank and find out what you have to do.
Discipline is the key to making debt consolidation loans work for you. If you have taken a debt consolidation loan, it is important not to take out a loan or another credit card because you will soon commit to getting back to square one.
3. What types of debt consolidation are there?
Almost all debt consolidation loans will become personal loans. You must go through the application process and get approval before you can begin the process of paying off your other debts. Another type of debt consolidation is the transfer of credit card balances.
A balance transfer involves transferring the debt to a new credit card instead of a personal loan. The difference between a personal loan with a credit card is a personal loan has a fixed payment and payment date, while credit card payments are based on the balance.
Use an online calculator to help you see exactly how a debt consolidation loan can help you get out of debt.
- Watch out for unexpected fees
When applying for a debt consolidation loan, be sure to check the fees charged. Most loans attract some kind of loan processing fees or other fees. Make sure there are no unexpected fees by asking for full details of all required fees. Choose the repayment period wisely. Maybe you prefer the longest run for a new loan. However, if you feel able to pay a shorter period of installments, you will save more interest in the long run.
5. Find out if early repayment costs will affect you
Before you take a debt consolidation loan, it is important to check all lenders about the costs that may arise. Some loans and lease purchases will usually charge an additional fee for early repayment. These costs are often calculated based on the amount of money still owing and the amount of time left in the term.
Call all your lenders and ask them to calculate the exact amount you’ll be required to pay to clear the debt. Because it will almost always be different from the outstanding balance you see on your statement.
Last but not least, using debt consolidation is a viable option if you can do it at low cost, without risking your assets or other people’s assets. Knowing the advantages and disadvantages of debt consolidation will also make it easier for you to decide whether to consolidate debt or not. Also, note that debt consolidation is only temporary and cannot solve your actual debt problem.
Many people have debt because they force themselves – using borrowed money, not for emergencies but instead to finance an unnecessary lifestyle. Indeed, debt consolidation can only cover the effects of this problem. It does not really solve it. You must fix the habit that keeps you dependent on the debt.
Otherwise, debt consolidation will not bring many benefits to your finances. Finally, once there is debt consolidation, make sure you replace the unnecessary spending habits to avoid increasing the debt payable.