Society’s dictates about living above your means have left most consumers struggling to manage their debt. If this sounds familiar and you are in the same boat, a debt consolidation loan could hold the answer.
What is Debt Consolidation?
Debt consolidation is the merging of all your accounts into one payment. Essentially, you’ll be taking out one loan to pay off all your other debt. The main advantage of this is to gain a lower interest rate and the convenience of having only one installment.
How can Debt Consolidation help you?
- It makes your debt easier to manage, as you’ll only have one payment.
- This can help you to pay off your debt faster.
- You’ll have a lower monthly installment, and therefore, a better cash flow.
- The interest can be much lower than credit and store cards.
- It can salvage a low credit score, e.g., instead of skipping payments because of many accounts, you now only have one payment to focus on.
- You’ll have a fixed interest rate, which can help you budget ahead and know exactly where your money’s going.
Read More About the different debt consolidation types
A few things to watch out for
- The loan term will be longer, which increases the total interest paid over the term.
- Moneylenders may persuade you to take out more than you need, which leaves you with a larger amount to pay back.
- You may be tempted to spend more and end up incurring further debt.
- You may not be offered the best interest rate, as lenders, in essence, are selling a product, and their first priority is to make a profit.
- Lenders may downplay the negative side of taking out a consolidation loan, like loan terms and other fees.
- Consumers with a lot of debt or a bad credit history may not qualify for the lower interest rates.
- You could land in difficulty if your lender goes out of business and passes your loan on to an unscrupulous third party.
- It can hurt your credit rating if you are taking out a very big loan.
Debt Consolidation for the Blacklisted
Lenders offer these to consumers who have a poor credit rating for being blacklisted, having defaults or judgements, etc. These lenders do not require that you put up your home or car as collateral. It would be difficult to get a loan from a bank if you were blacklisted, as banks have a strict qualifying process for which you have to have a spotless credit record. Taking out a consolidation loan if you have a bad credit history won’t give you the benefit of a lower interest rate.
Although debt consolidation can seem like a lifesaver, it’s wise to remember that using this option does not eliminate your debt, but merely moves it around so that your payments are easier to manage. The debt is still there, and still has to be paid. Debt consolidation will be beneficial if you focus on paying off your debt instead of incurring more.
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