An introduction to debt consolidation
A lot of us tend to take multiple debts from different creditors to solve our financial troubles. It usually starts with the first loan but doesn’t stop until you realize you have no idea how to manage so many different loans with their respective due dates and deal with lenders charging hefty interests. The best solution for this situation is debt consolidation.
What is debt consolidation?
- It basically means a debt relief consolidation, where you take a single loan to pay off all your debts from different creditors with different due dates.
- You will be combining all your debts into one and then going for debt settlement or debt management programs based on the debt amount.
- With the help of this, you will be benefited in many ways like lower interest rates, one single debt payment on a particular date, and you will also be able to clear your debts.
How does debt consolidation help?
- If you are able to do debt consolidation the right way, you will be able to enjoy a number of benefits of this method.
- You need not pay different interest rates for different debts; you have to pay a single interest rate for the debt settlement loan.
- Your monthly payments will also be lowered as you will make just one payment every month.
- When you are unable to pay a few debts out of so many debts, your credit score will be damaged. So, when it is just one payment, you may not have a problem as you will plan it according to the income you get every month. So, your credit score will be protected.
- You will also be able to close your debts without any kind of doubts. You will get at least 3 to 5 years for clearing the debt consolidation loan amount, which is definitely a pretty good time period.
How is debt consolidation done?
- You will have to first calculate the amount of debt you need to pay and the interest rate that you are paying for each debt you owe.
- The next step is to check your income. If you are earning more than the debts you are paying, it may be better to handle it yourself. However, if your income is lower than the expenses, a debt consolidation loan can be really helpful.
- You have three different options for debt consolidation: taking a debt consolidation loan, debt settlement, and debt management plan. All three come with both pros and cons, and, based on your needs, you will have to make a choice among these three options.
- Debt consolidation will definitely work, there is no doubt about it; however, most of these will take at least 3 to 5 years for the debt clearance and hence you need to have a little patience and stick to it.
Which debt consolidation is right for you?
- When you are making a choice among the three debt consolidation options, i.e., loan, debt settlement, and debt management programs, you will need to take the decision based on the debt amount.
- If the amount is less than $5,000, you can use a zero percent rate credit card to clear off the debts. However, you need to ensure that your credit score is really good, as people with high credit score will easily get the zero interest rate cards. You will be charged between 3 percent to 5 percent money transfer fee and you need to do it within the zero interest rate period, which is usually 12 to 18 months.
- If the amount is more than $5,000, a debt consolidation loan and debt management plan are the best choices. These two will have lower interest rates, and you will have to pay a small monthly amount.
- If you are having a really huge amount to settle, you can go for debt consolidation and debt management plan, but it is also good to go for debt settlement option.
How to find a debt consolidation loan?
- If you have a really good credit score, you can approach your bank(s) for debt consolidation loan, and they will approve it.
- If your bank(s) do not respond in a positive way, approaching lenders or mortgage companies is a good choice as they are not really rigid with credit scores.