People need money for different reasons, and sometimes the easiest way to get it is through borrowing. There are always different avenues of borrowing at our disposal, and if we use them, we end up having multiple debts to deal with. Having multiple loans can be overwhelming and challenging to manage. One major known way to deal with many debts is debts consolidation. It refers to taking a single new loan to settle liabilities and other loans. Debt consolidation may look like debt settlement. However, in practical terms debt consolidation combines the different loans you have and pays them as a single unit. Debt consolidation become most appropriate when you got high-interest loans that are getting out of hand or when you are planning to save on interest. Debt consolidation will help you make a single payment per month instead of multiple payments on different debts and companies. It will also save you interest charges and some of the fees incurred when one takes longer to clear their loan repayment. Debt consolidation loans have become increasingly popular and banks, credit unions, and peer-to-peer lenders are also progressively allowing this type of borrowing. There are also specialized consolidation companies that offer debt consolidation to the public. It is however important that you use review sites when selecting a lending company to take your debt consolidation loan. The reviews offer company consumer audit which help you determine whether or not the lending company is reputable. Avoid the negatively reviewed companies. There are Several ways that one can apply for debt consolidation and are discussed below.
These are personal loans that require collateral to back them. One qualifies for secured loans if they provide an asset as a security to guarantee payment. The assets provided as security must have either the same or more value than the amount in question—collateral ranges from tangible assets like cash, homes, and pieces of land.
It is worth mentioning, that with the emergence of cryptocurrencies, some lenders are now accept crypto assets as collateral. Such assets can be Bitcoin or any altcoin whose value is exchangeable to pay off the loan in case of defaulting.
These are loans that are not backed by collateral. Typically, with unsecured loans the lender will check your credit history; if it is good, then you qualify for one. People with fair scores will qualify for unsecured loans, though people with high scores get better interest rates.
You can also use the balance transfer credit card, which has a 0% introductory APR. However, submit your payment before the offer lapses. Failure to clear payments, interest rates will pile and may end up being more expensive.
Home equity loans
These loans can offer larger amounts and still have a longer repayment span with lower interest rates than personal loans. Nevertheless, home equity loans and credit line loans use your home or retirement benefits respectively as collateral. Many people don’t prefer them because they fear losing their homes and retirement benefits if they default payment.
Why is debt consolidation essential?
Having multiple debts may be overwhelming and stressful. It makes you spend unnecessarily and may put you into penalties for forgetting to submit payments. The following are reasons why you need debt consolidation.
- Improves your Credit score-When you consolidate your debts, this offers a chance to increase your credit score. A good credit score will give creditors confidence in you, and in return, you’ll enjoy reduced interest rates.
- Will save you from Collector agencies- Through debt consolidation debt collector agencies will be off your phone and post office box. You will also cut charges for phone calls and letters needed to reply back to the collector agencies giving you a chance to save more. The new loan should be up to date to avoid going the same road.
- To reduce interest rates– This applies to people who have high-interest rate loans. Debt consolidation helps reduces the burden and the interest that one pays, especially to the different creditors.
When should you consolidate your debt?
Debt consolidation is not always a smart move. It requires a proper calculation of the current payment plan and the expected schedule after consolidation. For example, if you are paying a collective interest rate of 16% before consolidation, it will be unwise to pay 26% interest after consolidation for the same period. It would help if you had an excellent plan in which you’ll also be gaining, for example even though the interest may increase, it should not increase significantly and the repayment period should maybe reduce. Here are instances where you should consider debt consolidation.
- When your debt can allow you to get 0% on the credit card or a lower interest loan.
- When you have a constant cash flow that covers your repayment.
- Have proper plans that will make you debt-free.
- When your gross income is more than 60% of your debt.
In conclusion with the insights in this article the reader is able to understand debt consolidation