Debt Consolidation 101
Learn the benefits and challenges of debt consolidation
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into one loan at the lowest possible interest rate. Rather than paying off several accounts every month, you only have to keep track of one. Since the interest is lower, your debt stays under control and more of your payment goes to paying off the principal (original debt owed) rather than the interest accrued every month.
How does debt consolidation work?
There are multiple ways to consolidate credit card debt. The method that you choose is based on your credit score and your personal preferences
- If you have good credit, there are do-it-yourself debt consolidation, which include a balance transfer and a personal unsecured debt consolidation loan
- If your credit history is not good, it’s likely you won’t qualify for do-it-yourself options. You will need to use a credit counselling agency and consolidate using a debt management program
No matter what route you choose the process of consolidation works in the same way. Rather than making multiple payments each month, you only have one payment to think about. Your main goal should always be to get the lowest possible interest rate.
What are the pros of debt consolidation?
Reduce your debt while saving time and money.
One of the easiest and most effective ways to manage your cash flow and get out of debt is to consolidate your loans, lines of credit and credit card balances into a single loan.
Debt consolidation has several benefits:
- Your creditors will be paid promptly in full by your service provider
- You will only have to make one monthly payment instead of multiple payments to different lenders
- Less of your money goes towards interest, which gets you out of debt faster
The greatest benefit to you is reduced interest rates. Consolidating your loans with a reduced interest rate will result in more of what you pay going to pay down your debt and less to interest and penalties allowing you to pay off your debt quicker.
What are the cons of consolidated credit?
When starting a debt consolidation service, you need to work hard to repay the money you borrowed. In most cases, as long as you consolidate your debt in a way that’s right for your situation, there is very little risk involved.
Here are a few challenges you should be aware of:
- You will likely still have access to your credit cards – Don’t overuse them and dive further into debt
- Financial institutions expect prompt payments – If you don’t complete your debt consolidation plan correctly and on time, it could damage your credit
- If you choose the wrong consolidation option, you could be looking at increasing your monthly payments or paying more in added interest before the debt is paid off
Again, there is no need to worry about any of the challenges as long as you choose the right consolidation program for your situation. The payments must be manageable for your budget and as long as you keep up with your payment plan, you shouldn’t run into problems.
If you are considering debt consolidation
If you are not sure if debt consolidation is the right solution for you, Consolidated Credit has trained credit counsellors who will evaluate your situation for free and help you identify which options work for you. To get started, call 1-888-294-3130 or request a Free Debt Analysis online now.