It’s happened to so many of us – before you realise, you find yourself with unpaid bills, overdue credit cards and more debt than we know how to (or can) manage.
If this sounds familiar to you, you might want to consider a debt consolidation loan as a solution to your debts. Here’s why.
What is debt consolidation?
Firstly, what exactly is debt consolidation? It’s a way to pay off multiple lines of credit with one loan that should give you a better average interest rate and a more suitable monthly repayment.
Debt consolidation loans are usually paid over five years.
Reasons to get a debt consolidation loan
If you’re looking for a solution to help you get out of debt, read on. A debt consolidation can help you with the following:
Pay less interest: This is particularly the case for individuals whose debts include credit card balances.
As most of us are all to aware of, credit cards usually charge very high interests unless the balance is paid every month. Moving your debt to a personal loan can lower your interest rate considerably.
Keep your debt under control: When you consolidate your debts into a single loan, you’ll only then have to deal with one creditor, one interest rate, one set of fees and one periodic repayment date.
And by moving credit debt (which is considered a “revolving” debt, one that makes it all too easy to be caught in the cycle of debt) to a personal loan, you will be able to break out of the debt cycle – as long as you don’t keep using those now-freed up credit cards! If the temptation is too strong, close the accounts once you’ve consolidated.
Make your income go further: One of the benefits of a debt consolidation loan is the flexibility to make a lower periodic repayment, so you’ll have extra money in your bank to put towards another goal, such as saving up for a mortgage deposit.
Minimise fees and charges: Rather than paying multiple annual fees and other charges to each of your creditors, you’ll only be accountable to one creditor. Do your research on the fee schedules of each of the lenders you consider.
Simplify repayments: Only one periodic repayment means it is much easier to ensure you pay your debt on time, every time.
Improve credit rating: You can actually improve your credit rating, as long as you make your repayments consistently on time. And if you are really disciplined, keep those credit card accounts open after you transfer the balances to your debt consolidation loan.
The key is to not rack up any more spending on them. By having unused, available credit, your credit score will reflect your good credit utilisation ratio.
But again, if you know that you’d find it too tempting to have available credit cards at your disposal, close the accounts and watch your credit score go up as you steadily repay your consolidation loan.
Reduce the debt term: Credit cards are like revolving doors – the available credit means that is so easy to stay in a never-ending cycle of debt, and it’s hard to see the exit. With a debt consolidation loan, you have a set loan term, which is usually five years.
You can view your remaining balance go down each time you make a repayment.
Avoid more serious options: In some instances, debt becomes so unmanageable that it becomes impossible to repay.
Debt Agreements and bankruptcy are two options available to certain individuals who are unable to repay their debts.
However, they are serious legal arrangements that have long-term consequences for those who use them.
If you feel like your debt is spiralling, taking out a debt consolidation loan can give you a leg-up so that you can take control of your situation.