It is almost impossible for an individual to go through life without using the services offered by banks, at least a couple of times. Our society has come to depend on various types of debt in order to enable us to purchase houses, cars, and even to pay for holidays.
This having been said, most lenders are constantly competing amongst themselves, in an attempt to offer the best possible terms and conditions. In return, most individuals end up taking out several loans, one on top of the other, and some also get credit cards that they use on a regular basis. This behaviour can quickly lead to total financial chaos. Accumulating a lot of debt makes it difficult to keep track of all the monthly payments that you must make, especially if each loan has a different or variable interest rate.
Luckily, there is a way to reorganise your finances if you have too much debt to keep track of. Debt consolidation is one of the most basic and easy ways to make your current debt cheaper, as well as to ensure that you never miss a monthly payment.
What is debt consolidation?
Debt consolidation refers to a loan that is specifically designed to give you the resources to pay off other types of debt. In essence, if you have three £3,000 loans, it is possible to take out a debt consolidation loan of £9,000. You can then use the money to pay off the three smaller loans and only have to deal with the larger one. This means that you will only have to repay a single loan, with a single interest rate, instead of several smaller ones.
By merging your debt, you can make it easier to both manage the monthly payments, as well as make your loans more affordable. In most cases, debt consolidation loans will have better interest rates than your existing loans and can help build up your credit score.
Although debt consolidation loans also affect your credit score, they have a smaller impact than other types of debt. In other words, if you have 2 credit cards that you have reached the limit on, a personal loan, and a home equity one, these can lower your credit score considerably. However, if you consolidate your debt, your financial records will show that you have only one active loan, raising your score.
What you should do before taking out a debt consolidation loan?
Debt consolidation loans can help reduce the stress placed on your finances, however, its value turns it into a very serious long-term commitment. Here is what you should do prior to consolidating your debt:
Calculate how much money you are currently spending on your debt:- Look at how much money you are spending on interest each month, including credit cards and lines of credit.
Look at the cost of early repayment for your existing loans:- It is possible for lenders to charge you if you want to repay your loans early. You will have to factor in this cost when deciding if you should consolidate your debt or not.
Calculate how much interest you would pay on a consolidation loan:- Consolidation loans can help you pay off more expensive debt, however, they also come with interest rates. The longer it takes you to repay the money, the more interest you will have to pay, which may lead you back where you started.
Shop around until you find a lender that suits you:- Most banks offer debt consolidation loans, however, if their terms do not suit you, you will be able to find more lenders online. Online lending companies may have slightly higher rates than banks but are more likely to give you a loan, regardless of your credit score.
These are the basics of debt consolidation. If you ever find that you have too much debt to keep track of, or that the total cost of your loans is too high, taking out a debt consolidation loan may be the best course of action. Consider both the risks and benefits, and bring order to your financial life.