What You Should Know About Debt Consolidation
Is Debt Consolidation An Option for You?
Debt consolidation consists of a loan to combine all your unsecured debt into one place and pay off the balance gradually with just one monthly payment. Additionally, this option gives you the ability to have a potentially lower interest rate. It is crucial to note that this approach also comes with additional penalties if you ever fall behind on payments. Before considering this solution, it is essential to make sure you are thoroughly aware of the following aspects:
One Single Payment
With this solution, all of your debts are combined into one payment. If you are struggling with managing multiple payments all in separate accounts, this allows you to consolidate and ultimately makes it easier to budget and plan.
Does Not Immediately Pay Off Your Debt
One important thing to remember with debt consolidation is that your amount due is only consolidated, not immediately paid off. If you are having trouble making your payments due to financial difficulties, this will not reduce what you owe. However, your interest rate may be lower.
Lower Interest Rate
The lowered interest rates are what make this solution ideal for some. If you are struggling with multiple high-interest credit card payments, debt consolidation can help by lowering your rate and decreasing the overall amount of interest you are required to pay over the lifetime of the loan.
There is a Cost
There are often much harsher penalties imposed on these types of loans. For example, if you have to put up collateral (such as home equity or a car) to secure the consolidation loan and then fall behind on payments, you are liable to lose whatever asset you used.
Longer Repayment Period
To make up for the lower interest rate on a debt consolidation loan, you will be paying less each month. This means, depending on the amount of your monthly payment, you will have a longer repayment period. Depending on your financial situation this may not be a concern, but it is something to take into consideration when developing a debt relief strategy.
Can Help to Improve Your Credit Score
If you can consolidate your debt and consistently make your monthly payment, this will prove to the credit bureaus that you are financially responsible and adequately managing your debt. Eventually then, this will help to improve your credit score over time.
Debt Consolidation Pros and Cons
- Single debt payment
- Lower interest rate
- Can help your credit score
- Debt is not immediately paid off
- Harsher penalties for missed payments
- Could lead to a longer repayment period
It can be beneficial during this stage of debt consolidation to identify what caused you to fall so far into debt. Was it an unexpected expense that caused your budgeting to spiral out of control? Overspending? Or a medical emergency? Identifying why you are in debt will help you to determine what steps you can take going forward to avoid taking on additional debt or plan for the unexpected. Liberty Debt Relief can give you advice that keeps you in better financial standing.
Life happens, and debt is a common problem that many people face today. However, there are options, like debt consolidation, available to help you regain control of your finances and debt. It is essential to do your research and only work with trusted organizations to order to find sustainable debt solutions that work for you.
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