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Having to repay different loans comes with an immense burden that only a few can cope. You have to work with several interest rates. The loan types might be different, and the due dates might vary. It creates confusion that makes it difficult to track the loans, and you are likely to default one or two, which then compounds your problem as you risk getting your property repossessed, and you might be forced to cover late fees.
That is why many experts will advise you to go for debt consolidation, which is getting a new loan to repay your current outstanding debt. Let’s explore further so you can learn everything about debt consolidation.
What’s debt consolidation?
A debt consolidation loan as a form of a loan will take you to replace and combine your existing loans. It usually takes place when you want to consolidate and pay off credit cards or some other debt. With a debt consolidation loan, you can simplify payments, get rid of the expensive credit card interest rates, and set monthly payments you can afford. Taking a debt consolidation loan means getting a new loan with a different monthly amortization, interest rate, and new payoff date.
How can you use debt consolidation?
Here is a simple walkthrough that details some of the ways you can use the loan to ease your current debt burdens. It will also help you understand how a debt consolidation loan works.
- Enjoy Lower Interest Rates
The biggest advantage you will enjoy after getting a debt consolidation loan is the lower interest rate. For example; you are looking to consolidate a credit card debt amounting to $10,000 and issued at a 14% APR; you can take a debt consolidation loan of the same amount at 10.13% and repay over a period of five years. It means you will be able to save a total of $3,663 in that period, all thanks to the lower interest rate you get when you switch to debt consolidation.
- Choose Your Preferred Payoff Date
You can also agree on the repayment period you need to clear the loan with your lender. It means that instead of repaying your loans with the fixed payoff date, you can choose an extended repayment timeline so that the payoff can be adjusted according to the amount you can afford to submit each month.
A longer repayment term will allow you to pay less each month while when you go for a shorter period, you will be able to clear the loan within a shorter period. However, you must take note that if you avail for debt consolidation, your monthly repayments will be higher. One disadvantage of longer repayment periods is that you can accumulate many years of interest charges. It could make the loan expensive when you compare it from those loans with a shorter repayment schedule.
- Simple, Easy-to-Track Monthly Payments
In addition to enjoying flexibility in how you repay debt, a debt consolidation loan helps you come up with an easy-to-track and manageable payment plans. When you have a pile of debt, you can lower your interest rates by switching to a monthly repayment plan that matches your repayment ability.
Things to Note About Debt Consolidation
- You Can Reconsolidate Your Loan
In some cases, if your debt consolidation plan fails to work, you will be left with the option to reconsolidate your debt. Is it allowed? Yes, it is allowed. It works in the way where you take a larger debt consolidation loan. You can also join a debt management program to clear one that you had applied earlier. The initial consolidation plan is part of the new plan.
- Consolidation Does Not Guarantee the Lower Payment amortization. Despite the high likelihood of enjoying the lower monthly payments, there is no guarantee that you will always access this offer. Some consolidation loans may instead increase your monthly amortization and in the long run, might cost you more.
- Works Best with Low-Volume Debt
Debt consolidation works typically best with low-volume debt. This includes tax debt, student loans, and credit cards. But for huge sums, this might not work well unless you are sure to get the higher repayments required to service the loan.
Having debt consolidation has its advantages and disadvantages, experts from www.moneylend.net actually say that it helps in organizing your debt paying goals and helps you get paid off much quicker. However, regardless of having debt consolidation or not, being responsible for paying back is what will get you off your debt.