Debt Consolidation is a type of loan that helps people to pay off their debts. It’s also known as debt settlement. With this, the borrower will combine the different types of credit cards, auto loans, student loans and mortgages into one payment at a lower interest rate.
Debt consolidation is an important decision to make because it can help to save money on interest rates and monthly payments. However, it’s not always the best option for everyone.
Your application for a consolidation loan will be approved if you meet certain risk criteria. If approved, your credit provider will pay off all outstanding loans and consolidate the debt into one larger loan. This will make repayments easier and save you money on administrative fees.
The term of a debt consolidation loan is usually longer than that of your original credit accounts. This makes them more affordable and lowers your monthly payments. However, it can make your debt more expensive in the long-term because it will increase the interest you pay. To make your monthly payments more affordable, you should aim to repay your debts as soon as possible.
After your outstanding debt is settled, your loan accounts, such as personal loans, are closed. However, credit cards and stores remain open. If you have had difficulty managing your debt, it might be a smart idea to close them.
Are Consolidation Loans Used in Debt Review?
You can use both debt review and debt consolidation to get out of debt. They do this in different ways. The best option for you will depend on how much debt you have and what options you have. Speak to a professional who can access your situation.
Debt consolidation involves consolidating all of your debts (credit cards, store accounts and personal loans) into one loan. This debt consolidation loan usually has a longer term which lowers monthly payments and makes them more affordable. This loan is a good choice if you’re struggling to make minimum monthly payments but still need some breathing room (lower monthly instalments). However, you must have a credit rating that is good enough to be eligible for a consolidation loan.
Your credit score may not be high enough to qualify for a consolidation loan if you are in deep debt or have been late paying for some time. Debt counselling might be the only option in this situation. This would require you to seek the advice of a debt counsellor who will assess your debt and help you structure it so that repayments are manageable.
What are the benefits of Debt Consolidation?
Consolidating debt can reduce your number of creditors to one. This is the first benefit. This is good news in two ways. This simplifies your repayments and makes budgeting easier, as you know exactly what amount will be taken from your account each month. Another benefit of debt consolidation is the ability to reduce monthly instalments and spread your repayments over a longer period. This is only if you have difficulty making minimum repayments.
What are the risks associated with a Debt Consolidation loan?
While lower monthly instalments may free up some money, this shouldn’t be taken to mean you have more spending power. This could lead to you falling deeper into debt. You should have some disposable income to pay off your debt consolidation loan.
Consolidating debt can pose a risk because, while it may help you make lower monthly repayments, it will encourage you to remain in debt longer which, as already mentioned, increases your debt cost and increases the likelihood of you accruing further debt. You should aim to repay your debts as soon as possible, even if you have to make lower monthly repayments.
Who is Debt Consolidation for?
A debt consolidation loan is a great option if you’re having trouble making your payments but have a good credit score. It will lower your monthly instalments and give you some breathing space. You will need to change your spending habits to ensure you can afford the minimum monthly repayments if you choose to go this route. To reduce the amount of time you are in debt, it is better to pay more than the minimum monthly.
You may need to review your debt situation if you have very high credit scores and are in significant debt. A debt counsellor will assess your debt and make recommendations to creditors. A clearance certificate is issued to you once all your debt has been paid.