If you have accumulated an enormous amount of debts and you are struggling to save enough money from your monthly income to pay them off, then loan consolidation might be an answer for you. Loan consolidation is a process that involves paying off your various small debts with one large loan.
Now you must be wondering how taking a loan to pay off other loans is beneficial? And most importantly how borrowing a large loan can be beneficial when you will eventually have to pay off a large sum of money one way or the other. Here is how it is going to be useful for you:
The convenience of handling one loan
First and foremost, if you find yourself juggling different types of debts at one time and struggling to keep track of each one, consolidating all of them into one loan would give you an ease of handling only one loan. That way, you would not have to keep a record of how much each loan is paid and how many installments or much more of each loan is left.
Lower interest rates
If you get approved for a low-interest rate consolidation loan, you get a chance of cutting down your expenses of loan exponentially. This happens because each loan, either small or big, comes with interest rates that could be high or low depending upon the policies.
Now, as you pay off each of your debts, you have to pay an additional amount for interest rate, which accumulates to a really large sum of money when all the interest rates of each debt are added together. But, once your debts are consolidated, you only have to make one loan repayment which means you only have to pay an interest rate of a single loan instead of multiple loans.
Smaller monthly payment
If you are under debts of multiple loans that require monthly payments, then you must have to save up a really big amount from your monthly income to pay off the installments of several debts. This way, all the payments equate to a much higher amount, although the debts you have, individually consisted of small installments.
As the sum of each debt payment equates to a much higher amount, the total of the money going from your pocket is significantly big. Consolidation of all your debts reduces not only the number of payments you have to make each month but it also decreases monthly payment amount. Where you had to save big to pay off your debts before, now you would only have to save enough to pay for one loan and that is a consolidation loan.
Fast debt repayment
When you have to pay off multiple debts each month, you also have to pay for their interest. This increases the monthly payment enormously and half of your savings of loan repayment go in paying the interest, leaving only a small portion of it to pay off the actual loan. This leads to a slower repayment of the debt as the debt is being paid off in small installments.
When you opt for a consolidation loan and it covers all your debts, your money is spent less on the payment of interest and more on the reimbursement of the loans. This way, you get done with the repayment of the debts much faster as you can pay off the debt with the money that otherwise would have been spent on paying for the interest of all the debts.
What Types Of Debts Can Be Consolidated
To understand what type of loans you can easily consolidate, you must first know the two major types of loans. These types are secured loans and unsecured loans. Most of you who already have taken multiple loans from either bank or other finance companies would be aware of these terms. But, if you are not then we will tell you what it is.
An unsecured loan is a loan that you borrow from a lender without keeping any collateral. This means, should you fail to repay the debt, you would not be deprived of any of your valuable assets to compensate for that loan amount. On the other hand, unsecured loans are taken out by keeping any valuable asset as collateral.
The collateral is usually equity that has the same monetary worth as that of the loan amount you borrowed. Typically, mortgage and car loans are its examples as in these loans if you fail to pay off the entire debts, either of these things is secured by the lender depending upon which loan you got. And, if you successfully make payments of the loan reimbursements, you earn the legal ownership of that entity.
Having explained what secured and unsecured loans are, lets now talk about what type of loan can be consolidated. Mostly, a loan without collateral, which means an unsecured loan, can be covered with a consolidation loan. Usually, these types of loans are credit card debts, student loans, and personal loans.
But, this does not mean a secured loan cannot be consolidated. This can happen but the process is quite complex and many of the times seems impossible because of the involvement of collateral that itself has a huge value. In Secured debt consolidation, the loan that is being used to consolidate secured loans must have to be big enough to release your collateral by paying the lender in full.
What Are Some Ways of Consolidating The Debt
If you have decided to bring your life back to the track and take control of all your finances and credit dues, then look at some of the ways through which you can achieve your goal of becoming financially stable again. These are some of the ways of consolidation so you can easily pay off the massive pile of debts.
Credit Counseling
There are proper credit counseling organizations that are nonprofit. They provide their services in creating a debt management program for you. This program is generated in full accordance with you and after reviewing your financial situation. They create a plan through which they effectively tackle your debt challenges.
They provide full range services in which they negotiate with your creditors to get them agreed on lower interest rates and sometimes they even get additional fees waived off. The credit counseling manages your dues and debts repayments by taking a certain amount monthly from you, then using it to pay off the debt to all your creditors.
How do they manage to pay from the monthly amount you give them, is their task to find out. For this purpose, they draw out a plan in which they include a strategy to deal with the creditors and loan repayments.
The best thing about credit counseling organizations is that you do not take a loan from them, you only sign up for their program, which gives you the liberty of signing off any time without any penalty. The counselors also counsel you on how to effectively manage your credit card balance and avoid accumulating debts again.
However, there are also some disadvantages to this method as well. You may be required to pay for the monthly fee for the management plan that would cost you more than your actual loan amount. The credit score tends to drop by a small portion during the first several months of the management plan. And, mostly all the counseling agencies want you to close off all your credit card accounts.
Personal loan
Another great way of paying off your debts altogether is by taking a personal loan and making repayments with it. Personal loans can be borrowed by banks, online lenders, and credit unions. If you do not have a good credit score that keeps getting worse as the due balance on your credit cards increases, personal loans are your best option.
In comparison with the debts management plan by a credit counseling agency, personal loans can be beneficial in many ways. They are borrowed on fixed interest rates therefore you know exactly how much you would have to pay off while making loan repayments. You do not have to go through a bad credit score in the starting several months.
The other perks this type of loan offers include no involvement of any collateral. So, if you are battling with the creditors of secured loans who want either their money back or any of your valuable assets with which they can recover their money, then you can use an unsecured personal loan to pay them off. This way you would not have to worry about collateral and such.
Apart from being fixed, the interest rates of a personal loan can be a piece of good news for you in terms of being low. This mostly happens when you possess good credit. These two benefits, fixed and low interest, together make a huge impact on your regular payments.
While you pay off your credit card debts with personal loans, you must keep in mind to stay away from making any purchases on your card for a while. If you continue to do so, the debt would get worse and you could end up facing default.
Balance transfer
Another way of consolidating multiple credit card debts is by transferring all the due balances of credit cards to only one card. Usually, the reason for doing this is to converge all your debts in one place so that all your additional money that was going in paying off interest of individual credit card dues would get decreased to a minimum as now you would make only one payment.
Another main reason for which people opt for a balance transfer is that when you apply for a transfer of your dues to one credit card, you get approved for a card with a low-interest rate. This is the essential feature of such type of debt consolidation and you get a chance to save up the money for dues payment instead of paying a massive amount for the interest of each credit card.
Many of the times, the introductory period of transferred balance includes no-interest credit repayment and this method also charges either minimum or no fee at all for the processing. So, by transferring the balance to low-interest credit card, you not just save up enough money to pay off the debt faster but the whole management of your dues become easy.
Everything has a downside to it. This method is highly beneficial if you get approved for it but the approval process of a balance transfer is not something easy. One should possess a really good credit score to be accepted for a balance transfer. Also, paying off your debts with one credit card is only possible if you manage to get approved for a high credit limit.
Debt consolidation loan
Now, let’s talk about the loan that is specially designed for only one purpose, debt consolidation. This loan goes by the same name as its function and it works just like any other debt consolidation process. It consolidates all your loans to a single loan with a fixed interest rate that is generated after averaging the interest rates of each loan included in the consolidation.
Many direct lenders offer debt consolidation loans. Admiral Finance is one of the good debt consolidation companies in New Zealand offering this loan and its services in assisting you to manage your dues and finances efficiently.
Their application process is simple and fast and you are only required to fill in brief information about yourself. Within a few hours, you get to know your approval status and funds are transferred into your account the same day.
Bottom line
If you ever find yourself deep under the pile of several debts, know that there is always a solution for every situation. Even though it is really important to not let the dues accumulate insanely if you still face difficulties in paying off your debts, then apply for debts consolidation before your credit score gets extremely challenged.
