Debt consolidation includes borrowing a sum of money from a lower interest lender to clear out your debt with the higher interest lenders. With this movement, you can get rid of high interest debt and just be left with an easy to manage, lower interest loan!
Why should you consolidate?
Opting for another loan appears like the last option that a debtor would want to do, but there are two amazing reasons why you should consolidate your debt:
- Pay lower interest and get debt free faster
Who hasn’t heard of the stats, and it goes like this: if you have a credit card debt of $10,000 with an 18% rate of interest and you can only pay a minimum of $200 per month, then only $46 of the money is going towards the principal and the rest $154 is spent on the interest. This way you’ll end up paying $9261 as interest in eight years…!
But with debt consolidation, you can easily opt for a consolidation loan of $10000 at an interest rate of 9.5% and use it to clear your credit card arrears. And this way you can pay your loan in a period of 5 years or so with $2700 of interest in total.
- Ease your planning and payouts
If you’re under debt of different lenders, then it may be difficult to keep a track of different due dates and payment amount. In fact, you cannot easily track your progress also. But, with consolidation of debt, you only have to pay for one loan and just have one account to track. Thus, it is a simple and easy to handle repayment plan.
With debt consolidation, you can efficiently monitor your spending habits. You can prepare a budget and make use of money management tools to control your extra expenses. Talking about budget, you also need to have a good strategy to cover your expenditures without switching to credit card or greater interest loans. A low rate loan plan will help you get rid of your credit card outstanding, but if you do not control your expenses, you’ll be back at the starting point along with an extra loan amount on your head.
Debt consolidation is more like an instrument, not a full-fledged solution. One needs to use it cautiously and save thousands of dollars in interest every year. It can serve as a great method by allowing the debtor to get a perfect grip on debt and loan, but with cautious steps. As a borrower, one needs to be very clear about the advantages that it will render in comparison to the present loan structure and you surely need to do calculate it well. What is even more important is debt consolidation loan shouldn’t be taken as a license to go for additional debt. The purpose of the loan is to lower down the pressure of your unpaid arrears; you shouldn’t end up taking new debt. It will lead to a dicey condition and eventually more fiscal distress.