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You are probably overwhelmed by the financial burden of multiple loans, and you have tried endlessly to pay off your debts all to no avail. You can’t wait to clear all your credit card debts and become debt free once again.
Whether you are buying a new car or paying for your education, some debts can quickly lead to high-interest rates and hard-to-manage monthly bills on your credit cards or loans. While taking loans can sometimes be inevitable, what matters is how you manage your debt. For a lot of people, debt consolidation is the way to go. Many Americans struggling with credit card debt, payday loans, student loans, or other personal debt, have found relief in debt consolidation.
What Is Debt Consolidation?
Debt or loan consolidation is the debt reduction strategy that combines multiple debt instruments into one monthly payment to simplify the payment process, loans, and other bills. Debt consolidation can help you streamline your payments and make it easier to manage your debt.
By consolidating all your debts into one payment, you can greatly simplify your debt management. Debt consolidation allows you to pay lower interest rates each month than you were paying before and gives your creditworthiness a big boost, among other things.
Some practical ways to consolidate your debt include getting a personal loan, transferring multiple credit card debts onto a single credit card, using a home loan, or even a 401 (k) loan.
Let us take a closer look at how debt consolidation can put you on the path to being debt free.
Convert multiple payments into one payment
Debt consolidation greatly simplifies paying off your debts and can even lead to lower monthly payments as it gives you a longer time to pay off. If you are like most people with multiple credit card balances, bringing everything together in one source will make you feel like the weight has been taken off your shoulders. Of course, your debts still exist and are not magically reduced, but now that you do not have to worry about several payment deadlines, you can take your time and focus on a single source of debt.
Lower interest rates
Most unsecured debt, especially credit cards, have high-interest rates, which can dramatically increase monthly debt. If you pay off multiple high yield debt accounts and consolidate them into one, you’ll get to pay less in the long run by securing a lower interest rate on your new single account provided you have good or excellent credit.
When it comes to finances, your credit score is a key factor in determining the interest rate you can expect when consolidating debt. People with excellent credit (720-850) can get between 4-20% on their consolidated debt, while the interest rate can be as high as 15-36% for individuals with poor credit score (300-639). Regardless of your credit rating, the interest rate will likely be lower than what you are paying now.
Can Improve Your Credit Score
Another way debt consolidation can be of advantage is that it can give your score a big boost. If you consolidate with a personal loan, your score is likely to increase in a few months as your credit utilization (also known as the credit utilization ratio) decreases.
This number is the amount of your current debt divided by your credit limit. If you have $ 4,500 in total credit on two different credit cards and $ 2,250 in credit on one of them, your credit usage is 50% because you are using half of the total available credit. The use of credit plays a vital role in your overall credit rating.
However, keep in mind that it is normal for you to notice a slight temporary drop in your credit rating every time you buy a new loan. However, you will discover that you have made a financially sound decision when you begin to see the long-term gains in your credit score and interest savings.
Consolidating your debt into one manageable payment will dramatically reduce your stress and eliminate the mess multiple payments can create. A financial matter like debt is known to cause stress, but it doesn’t have to be. When you take control of your finances and allow yourself to be in charge of just one monthly debt payment, you’ll be able to clear your mind and find yourself in a better financial position.
It usually takes several years to pay off credit card debts in full. Since credit cards earn interest on what you owe, lenders care less about the number of years you need to pay off your debt. One of the benefits of debt consolidation is that the consolidation process has to consider a variety of factors when setting up the credit term, such as income, credit rating, and how much you owe to create a reasonable recovery plan. This is the reason why debt consolidation loans have a shorter repayment period.
Managing your finances can be difficult and confusing, especially if you have a debt burden that spans multiple credit cards and credit accounts. For people who have been using payday loans for a while, getting out of credit, and paying off loans is a common effect of getting lost in the mess of loan rollovers and reborrowing. And that can put you in more debt.
Debt consolidation is a strategy often used to stay organized when managing your own finances, especially the debt burden. Plus, you do not want to affect your balance just because you forgot to verify one or two accounts. The main reason why you should consolidate your debts is to eliminate multiple repayments with multiple terms and different interest rates. Imagine paying a single credit card or a single loan account to a single lender each month, isn’t that a relief?
There are two debt resolution options. With the first method, you need to secure a bigger loan to cover all the active loans, while the other is a special debt management program that combines all your debts into one account with a significantly lower interest rate.
Debt Consolidation Loan
Acquiring a much larger credit is one easy way to manage multiple credit cards or loans. This credit can be provided by a bank, a credit union, or an approved lender. The loan amount should be high enough to pay off all your existing debts at once.
In contrast to a payday loan, a debt consolidation lender examines the creditworthiness of the borrower. However, this does not mean that a borrower with bad credit stands no chance of securing such a loan. Instead, lenders will use the borrower’s credit score to determine the interest and other credit charges. This means you can get the loan with bad credit but with more fees and higher interest rates.
Debt Consolidation Program
The second type of debt consolidation does not require a loan. Debt consolidation programs are a viable solution for payday borrowers with multiple loans from one lender.
Payday lenders can offer this type of debt relief program, in which multiple debts from a single borrower are merged into a single payment line. In this way, lenders can increase the possibility of collecting their debt from borrowers.
Third-party credit counseling agencies are also involved in this initiative. These specialist debt consolidation service providers negotiate with lenders about lower interest rates on behalf of their clients. Debt consolidation agencies are suitable for borrowers who have multiple debts from different lenders.
The debt consolidation program requires that borrower sends a one-time payment to the credit counseling agency. The agency then distributes this payment to lenders under the new term, which the agency must have negotiated. Credit counseling agencies can also help you avoid unnecessary financial burdens responsible for your perpetual indebtedness.
If you are looking for a way to pay off your loans more efficiently, a debt consolidation program might be the perfect debt relief solution for you.