Three Major Reasons to Consolidate Your Unsecured Debt
While looking for credit management options, you may have come across the term ‘debt consolidation’. Ever wondered what it means and how it can help you manage your finances?
In the simplest terms, debt consolidation combines multiple debts which are generally high-interest unsecured debts like credit card payments, into a single payment. Debt consolidation is adopted by many especially in the hope of getting a lower interest rate. It can help you reduce your overall debt and reorganize your credit such that you can pay it off faster.
If you have a huge amount of debt and wish to reorganize different bills with varying interest rates, due dates, etc, then debt consolidation can be the right approach for you. Read on to find out why consolidation of unsecured debt can help you in more ways than one.
Understanding Debt consolidation
Debt consolidation involves taking a fresh loan for paying off all the existing loans, especially unsecured loans, to make a single monthly payment instead of worrying about making several every month. The idea is that a single payment is far easier to manage as compared to multiple. This way, you can lower the overall interest rate and also the monthly payments while ensuring that you pay off your debt much quicker.
Key Reasons to Consolidate Debt
- Several Debts v/s One
Debt consolidation is generally used by individuals who have the burden of several debts from several finance providers. These could be student loans, personal loans, credit card dues, etc which are unsecured. It could be very difficult to manage multiple debts with chances of missing on repayment dates or failure to manage them efficiently.
- Eases Burden
The primary reason why debt consolidation is essential is that it can make your life stress-free. After a certain point, it may become challenging to keep up with various loan EMIs, due dates and values. Problems can multiply further if you have many bank accounts and multiple EMIs on different accounts for different dates. This means you would have added responsibility of maintaining and constantly funding all the bank accounts. Similarly, keeping a track of many credit card dues and payment dates can be tough. With debt consolidation, you have to look after only one loan on a given date of each month.
- The benefit of Lower Interest Rates
Debt consolidation can help reduce overall interest rates. If you use it for your credit card dues, you can expect the interest rates to significantly lower as compared to what is charged on your card. Credit cards mostly come with higher interest rates and debt consolidation can help in getting rid of higher interest in the long run. Same goes for other smaller loans. The amount of EMI paid by you after debt consolidation can be lower vis-à-vis previously made payments in servicing various loans and debt outstanding.
However, you must bear in mind that low interest rates are offered to those who can provide collateral while applying for debt consolidation. This is also known as secured debt consolidation. In case you are unable to provide collateral against the loan, it gets clubbed as unsecured debt consolidation and the interest charged will be slightly higher.
Debt Consolidation is Multiple Payments Combined into a Single Payment
Debt consolidation makes debt payment much simpler and can result in reduced monthly payments because of a longer repayment period. If you’re struggling with multiple credit card dues, consolidating all debt obligations into a single source will reduce the debt burden significantly. Your debt may still exist, but since multiple payment deadlines will no longer be applicable, you can look after just one debt source.
Things to Remember
- You may not be able to access a debt consolidation loan at all times. This depends on whether you meet the eligibility criteria, your current financial situation, amount to be borrowed, credit history etc.
- While you may be stressed about all your current loan obligations, don’t be in a hurry to apply for a debt consolidation loan from multiple banks at one time. This can hamper your credit score and could affect the chances of easily obtaining low-interest credit in the future.
- Debt consolidation loans are not an ideal choice for everyone – for instance, if your job is seasonal and your income is not consistent across the year, you may not be able to stay committed to regular monthly repayments.
- Catering to your existing debt obligations via an affordable repayment plan may help in relieving you of emotional and financial stress. However, this relief may get you more confident about your financial situation and it could affect your spending habits.
- You may have to pay more interest since managing short-term debt over the long term will automatically increase the interest charges over time.
- In case you opt for secured debt consolidation, you may have to set your property or mortgage aside in case of potential default.
Is Debt Consolidation the Right Choice?
Debt consolidation has many advantages to offer. There are also some downsides to be considered before applying, however, if there is a possibility of being debt trapped, you can choose to consolidate and make use of various credit facilities without any worries. A consolidation is an ideal approach for repaying all your credit borrowings and handling your finances in one go. If you’re prepared, begin looking into debt consolidation options and choose one which is an ideal match for your financial situation.
Wrapping Up
As with any other financial matter, you’ll need to carefully assess your situation before determining an ideal debt consolidation alternative. There are many benefits to be had from debt consolidation which make it a worthwhile choice to consider.
It will help in bringing together all your debt sources and combine into one monthly payment with a far lower interest rate. It will also help to boost your credit score and allow you to focus on more important financial matters.