Debt consolidation refers to taking a host of small debts and combining them into one single larger loan. While, for some, this will not make a great difference to their financial situation, especially if their income is considerably less than their outgoings, for others it can be an invaluable tool in the quest to manage their money better and even become debt-free as soon as possible. Here are some ways it can help.
Reduce Long Term Pay Back
Firstly, one of the main benefits of debt consolidation is to reduce how much you are paying back, both on a monthly and on a long-term basis. This is because, for example, ten payments of $10 to $20 (maximum due $200) can be reduced to a single monthly payment of, for example, $100 or $150, under the terms of the debt consolidation loan.
Avoid Additional Interest
Partial reductions in your payments will be because of the recalculated interest. Larger loans tend to have lower interest rates, and debt-consolidation loans usually have any interest, charges or fees built-in from the moment you sign the agreement. Often debts can spiral out of control because of the addition of monthly interest charges which prevent the body of the debt being substantially reduced. It can be tempting to think that relatively low account balances are not so very costly, but reading the fine print on the interest rates and working out just how much you are paying for your purchases can be an eye-opener! For additional information on how debt consolidation works you can click here.
Have A Specific End Date
Getting rid of the constant addition of interest on top of the debt owed means that you will have an agreed end date for the debts you owe. Debt consolidation loans can run for anywhere up to seven years – but once the agreed-upon amount has been paid back, you will be debt-free. There is something very comforting about having a specific end date for getting out of debt and breaking the cycle of constant indebtedness.
Psychologically, an end date can be very reassuring. Having debt accumulating with every month that passes can be stressful, and therefore have a fixed amount to repay is a better option; you know exactly how much money must be set aside for the loan and can tailor your budget accordingly.
As always, knowing exactly how much you owe each month, will allow you to practice better financial organization. Setting a budget is much easier when all the variables are known, and having a set amount for debt repayment ensures that you will not only be able to cover the loan requirement but that you will also be able to meet all your other financial commitments. Having savings helps you to earn interest – always a nice change from paying it! – and also means that you then have a nest egg in the event of a sudden emergency or urgent bill. This may have been the sort of thing that might have previously tipped you even deeper into debt.
Perhaps the most noticeable change will from having payments come out of your bank account once or twice a week, all for different amounts to different accounts, to now only having one (admittedly fairly large) payment coming out of your account on a specific date each month. This will help you to ensure that the commitment is met, as it can be all too easy to forget one or two small payments in a particularly busy week!
Freed Up Lines of Credit
Having all your small debts and credit card balances rolled into one easily manageable loan means that you will have freed up all your lines of credit. Be very wary about using these accounts again, and make sure that you do not simply run up the same debts all over again. Otherwise, you will put you back in the same financial hole, but even worse off because of the additional debt of the loan.
If you cannot trust yourself, ask your account provider or credit card issuer to reduce your limits to something much more manageable. Most establishments will do this willingly, and once the consolidation debt has been paid off, you can always increase your limits once more – unless you decide to embrace a borrowing-free existence! Of course, sometimes emergencies happen, and when they do, having a paid-up credit card can be a life-saver. If this does happen, ensure that you re-work your budget as soon as possible, to pay down the new debt alongside the existing loan. This is a useful way to get into the habit of financial prudence.
Whatever your reasons for being in debt, or your reasons for needing a debt consolidation loan, be sure to check out the debt consolidation options available to you today and do your research.