Introduction to Debt Consolidation
What is Debt Consolidation and how does it work?
Debt consolidation is when you take 2 or more of your existing debts and group them together into one payment. You can do this by taking out a loan (from a bank) that is big enough to pay off all of your existing smaller debts. It works well because you can normally get a big loan for a lower interest rate than you would get from a credit card company. The lower interest rate gives you the opportunity to pay off the loan sooner than you would have by paying off each individual debt at higher interest rates.
Pros vs. Cons
Like most things in life, there are pros and cons in consolidating your debt. A few of the benefits of consolidating your debt are as follows:
~ Your one loan will most likely be paid off sooner than all of the smaller debts as the interest rate on a loan from the bank is often lower than that of unsecured debts such as credit cards or pay day loans. Therefore more of your payment goes directly to the principle of the loan rather than paying more towards the interest.
~ It is simpler to make one payment every month instead of making several payments to different lenders or credit card companies.
~ Your creditors will be paid in full by the loan from your bank.
On the flip side, there are a couple of things to consider when thinking about consolidating your debts.
~ If your credit isn’t in good shape, you may not qualify for a consolidation loan.
~ If you cannot afford the new payment, even with the lower interest rate, you may not be approved for a consolidation loan.
~ It is very important to make your payments on time. If you miss payments it can affect your credit rating.
~ If you continue to spend on credit, then a consolidation loan may not help you to get out of debt. Some people feel that they have their debt under control, so they spend more money and get themselves back into the same situation again. If you are going to take out a consolidation loan, make sure you are ready to make changes in your spending habits.
…Continued next month