If you feel you are drowning in debt with no end in sight, debt consolidation might be a solution. However, it is not something that consumers should enter lightly as it has long-lasting repercussions.
When you decide to go for debt consolidation, your debts are combined into one loan you pay off in monthly installments. The interest rate should be lower, making this repayment less than what you were paying beforehand. But is debt consolidation right for you?
Different debt consolidation loans
Personal Money Store is a proponent of letting clients examine their options before choosing a solution like debt consolidation. Debt consolidation is usually used for loans, student loan debt, and are in over their heads with credit card expenses. Creditors favor a debt consolidation loan as it improves their chances of collecting money from a debtor, although it might be a little less or take a while longer.
Most debt consolidation loans are secured, meaning that you have to offer collateral assets to the lender. They can claim these assets if you do not stick to the agreement and pay the monthly installments.
Companies tend to insist on your house or car as collateral for a secured debt consolidation loan. Unsecured debt consolidation loans require no assets offered as collateral. They are extremely risky, and few companies contemplate giving them to already indebted customers.
Debt consolidation advantages
If you have multiple debts with high interest rates, such as credit cards, or substantial repayments like on a personal loan, debt consolidation might be the ideal vehicle for getting yourself back on track.
Instead of paying several creditors, you only have one outstanding amount to pay. Provided you do not go into additional debt, you can finish paying off your debt and start with a clean slate.
If you stay up to date with your debt consolidation loan installments, you will no longer have creditors calling and sending you letters. This reduces many clients’ stress levels and allows them to focus on building a debt-free future.
Debt consolidation disadvantages
Debt consolidation has some pitfalls, and it would be remiss of you not to consider them before committing to it. Most debt consolidation loans have a longer payment schedule. It means that you will be paying your debts off over a longer timeframe. Due to interest being charged for a more extended period, you might wind up paying more than if you stick things out now.
Many debt consolidation companies prohibit clients from seeking new credit loans while they pay off their existing debt. That means you will not be able to borrow money from a bank for a medical emergency or open new credit card accounts.
Do you qualify?
Debt consolidation is not something offered to people just because they are in debt. Like any business, a debt consolidation company needs to make money. Therefore, they will investigate your ability to repay the loan they extend to you. Applicants must prove that they are employed and how much they earn so the company can decide if they are worth the risk of lending money to.
Applicants should also have a good credit score to qualify for debt consolidation. The company wants to see that you have behaved responsibly with debt in the past, as this indicates how likely you are to pay off a debt consolidation loan.
Is debt consolidation for you?
With a unique financial situation, no one can tell you whether debt consolidation is your best option. However, with the right guidance, it is possible to evaluate your options and decide. Go into any agreements having made an informed choice and with your eyes wide open.