Dealing with a number of personal loans can be a challenge. The fact that you make payments on different dates, you are paying different creditors who have their respective accounts. Since the repayment installments are different, keeping track of all this information can lead to some problems. Then you may need a debt consolidation loan.
You may forget making payments when they are due. There are also possibilities that the accounts through which payments are to be made are overdrawn. These problems lead to late payments and fines, underpayments and penalties that end up increasing the amount owed. The stress that comes with multiple loan repayments can be overwhelming. When you have just completed paying one of the loans, another bill pops in all of a sudden.
This can lead to stress taking a toll on your health. Luckily, there is a solution to this—you can have the debt consolidated, meaning that all your loans are combined into one large debt. This means that now you owe one person or one financial institution. This makes it easy to pay and track.
While loan consolidation does not take away the amount owed, it has some benefits which we will see later in the article.
The basic principle of debt consolidation is combining all loans’ monthly payments into one. One of the main determinants of the option taken is the credit score. This emphasizes on the need to maintain a good credit score.
What is a debt consolidation loan?
A debt consolidation loan is a type of credit which pays off all the existing loans, leaving the borrower with just one monthly payment to focus on. In some instances, debt consolidation loans offer the borrowers a lower interest rate and the repayment period can be extended. It is a form of debt management chosen for simplifying finances, ease of management and more capability for savings. To allow better management of debt, borrowers are advised against taking credit on loan accounts which have been freed after the consolidation. Any financial expert will tell you that doing this only puts you into more debt and may end up hurting your credit score and future borrowing.
How does it work?
A debt consolidation loan comes as a lump sum, an amount that you are supposed to pay off the existing debts. This means that you will not be juggling with several payments and the focus will be just one loan. When you get the money, pay the multiple loans, the amounts that have varying interest, different terms, interest rates and even accounts. An analogy that clearly describes how this works is one where you are required to pay several people, let’s say their monthly salary. Instead of making payments from several accounts and in different periods of time, you decide to have an account where they will all be paid from at the same time. Doing this frees you from the hustle of keeping different records or accounts, the cost of having to call them to receive payments and the frustration that may arise when you do not have money at hand to make the payment. With a debt consolidation loan, you have all the other debts taken care of and only one loan repayment to worry about.
Why consider Debt Consolidation?
There are a number of reasons why you should go the debt consolidation route:
Simplification of finances
Instead of keeping track of many debts, you only have one. With many debt repayment schedules, chances of missing one are high. Missing a loan repayment schedule hurts the borrower as the credit rating is affected. With debt consolidation, the borrower with a number of loans will only have one loan repayment schedule—and this makes it easy to track.
Helps save money
Through debt consolidation, one can save money through the reduction of interest rates. There are some types of debt consolidation where one can negotiate for low interest rates. This normally happens when one takes a new large loan with low interest rates and uses the amount advanced to pay off the small debts. Although there are some disadvantages with this arrangement, if implemented successfully the amount charged in terms of interest rates can be lower, leading to savings. All you have to do is pay off the higher interest debts with a lower interest loans and make sure you do not borrow within the repayment period.
Makes it easy to manage credit
Multiple loan accounts can be a problem when it comes to debt management. You will be worrying about several things such as forgetting to make payments, interest rates and penalties that arise with non-payments among other issues. When you consolidate your debt, all the focus now shifts to the new loan. This makes life easy and your stress is reduced given that you will have less things to worry about.
If you can negotiate and get a lower interest rate and the new monthly repayment stays pretty much the same as it was, you stand a chance of paying the debt faster than before. With a reduced interest and the maintenance of a similar repayment amount, the chances of paying off the debt is faster than it would have without a loan consolidation. Faster repayment improves your credit score and subsequent borrowing.
Applying for a consolidated loan
To qualify for a debt consolidation loan, you must have a high credit score and at the same time provide details that you are capable of refinancing the debt. Each lender may ask for different documents based on your credit history and income.
No need to struggle! Manage your credit by getting a debt loan consolidation to deal with credit easier and lighten the load of tracking multiple loans minus the hassle that comes with dealing with several creditors.