What is Debt Consolidation?
Debt Consolidation is a type of debt financing that involves taking out one loan to cover many others. This commonly refers to an individual financing plan for people dealing with too much consumer debt. It has the potential to make both creditor and debtor happy. The debtor gets low-interest rates and a simpler repayment plan with the possibility of reducing debt.
Weigh Your Options
Before you consider debt consolidation, you need to have a goal – either get rid of your debts entirely or get a good credit score and a low-interest rate. Or do you want to use consolidation as a debt solution? Consolidation is good in situations where several debts need to be managed. You could get a new loan to deal with all of those debts, or you could roll them into a consolidation program with a lower interest rate.
In general, this debt consolidation works best when all of your debts are unsecured, such as car loans, medical bills, store charge cards, and personal loans. It makes little sense to combine all of those loans into one monthly payment. Instead, consider paying off one or two of the loans first. This will allow you to have the money ready for the consolidation, simplifying things from there. Of course, some of the loans will still have to be paid, which is where the consolidation will provide you the room to settle your outstanding borrowing.
Consider the Interest Rates
One of the ways to save money on a debt consolidation loan is to lower your interest rate. Most lenders require you to have at least a fixed rate because they don’t make much money if they have to repeatedly loan out the same amount of money. If you can reduce your interest rate, you will save yourself thousands of dollars over the life of your loan. If your balance is large enough to require a lower interest rate, you may also want to consider reducing your monthly repayment. This will keep you from having to make larger payments later on.
Consolidating Your Outstanding Loans
Another great way to consolidate debt is to take a loan that pays off your high-interest debts and put all your smaller loans into one payment. This will give you peace of mind as well as help you manage your budget. After you pay off the loan, you will only have one payment to worry about.
Many people use consolidation loans to get out of financial stress after a major life change. If you have several small loans, it is easy to forget which loan is due and next. The goal of a debt consolidation loan is to reduce your interest rate and your monthly payment.
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