If you’re tired of keeping up with multiple loan payments, debt consolidation may solve your repayment woes. It’s the best way to streamline repayments and help you better handle your debt.
Here’s what you need to know about debt consolidation:
What is debt consolidation?
Debt consolidation is when you combine various debts (i.e., loans, credit card debt, etc) from various lenders into one loan. For example, you can merge your remaining $3,000 car loan balance, $2,000 personal debt, and $1,000 credit card debt into a single $6,000 debt consolidation loan.
When you take out a debt consolidation loan, your outstanding debts or remaining loan balances will be paid off using that loan. Once your old debts are paid off, you’ll make repayments on the debt consolidation loan.
A lot of borrowers opt for debt consolidation because it’s easier to manage payments. Instead of having multiple active loans or debt, you’ll just have one debt consolidation loan to pay back.
Pros and cons of debt consolidation
Taking out a personal loan for debt consolidation is a serious commitment. Make sure it’s the right one for you by looking at the benefits and drawbacks of a debt consolidation loan.
Advantages of debt consolidation
Here are some perks of debt consolidation:
- Make one repayment every month, fortnight, or week. This is a huge boon for those who have trouble staying on top of their repayments. When you’re making multiple payments a month, it’s hard to budget properly and manage your finances. With a debt consolidation loan, you only pay once every week, fortnight, or month.
- Get a fixed rate and better terms on your loan. You can take this opportunity to obtain a fixed-rate loan. This may make it easier to pay off your debt as you have a consistent and predictable repayment amount. You could also save more by finding a debt consolidation loan with low rates.
- Reduce your repayment amount. You can extend the term on a personal loan for debt consolidation and lower your regular payments. This can help you budget better and make your debt more manageable.
Disadvantages of debt consolidation
Here are some things you should be aware of about debt consolidation:
- It could take longer to pay off your debt which could cost you more. A personal loan for debt consolidation with a longer term may reduce repayments. But you may pay more interest which runs up the overall cost of your loan.
- It could negatively affect your credit score. If you miss a payment on a debt consolidation loan, you may see your credit score go down a few points.
Different ways to consolidate debt
In addition to a personal loan, there are other methods to consolidate debt. The key to a successful debt consolidation is figuring out which one is best suited for your financial situation.
Personal loan for debt consolidation
Personal loans for debt consolidation work like your standard loan. You may make weekly, fortnightly, or monthly payments to pay off the principal loan amount plus interest. Depending on the lender, you have an option to pay off your loan early.
These personal loans can be unsecured or secured. A secured personal loan requires you to put up an asset to use as collateral in case you default on the loan. An unsecured loan, on the other hand, does not require any guarantees from the borrower.
Credit card balance transfer
When consolidating credit card debt, you may have the option to put all of it into a new credit card. This type of debt consolidation is usually quicker and easier to get. However, this method may incur higher interest rates and fees compared to a personal loan.
Refinance your mortgage
You could refinance your mortgage and increase your payments to include your debts. This may be ideal for those who want to secure lower interest rates. Take note, since mortgages have longer loan terms, you may be paying more over the life of the loan when consolidating debt into your mortgage.