your loan once every month instead of several smaller ones on different dates.
Not all types of debt consolidation involve receiving a special loan. If you have a credit card that has a high enough credit limit, you can use it to transfer balance from all your cards to put your debt into that one card. Other common ways of debt consolidation consist of home equity loans, personal loans and student loans. Regardless of what type of debt consolidation you opt for, the end objective is always to combine your existing debt into a single loan.
Dealing with debt can be a big inconvenience and struggle, but in most cases, bankruptcy is just not an option. This is because declaring bankruptcy will destroy your credit score. At such a time, debt consolidation is seemingly the only available option. Even so, you must realize that it has some advantages and some potential pitfalls you should be careful about.
Lower interest rates – You should be able to negotiate a lower rate of interest with your creditors during the process of debt consolidation. There are professional service providers who will take care of these negotiations on your behalf, for you. Lower interest rate translated into lower cost of overall debt.
Debt becomes more manageable – After the consolidation is complete, you are required to make just one payment to the firm that consolidated your loan. This means that you no longer have to maintain a reminder list for all the little payments you had to make throughout the month. No worrying about different billing statements, payment amounts and due dates. This way to paying off debt is easier, time-saving and more comfortable.
Improved credit score – Defaulting on your monthly payments or making late payments negatively affects your score. When you consolidate your loan and start making regular payments (because it’s easy to keep track of one payment), you are on your way to a better credit score. Also, when you balance transfer into one card that has a higher credit limit (as opposed to several smaller maxed out cards), it reflects positively on your credit score.
Create more debt – As you get comfortable with your consolidated loan and the method of payment. You may start assuming that you are financially stable once again because of the convenience and sense of order that it brings. This may lead you to think that you can afford to push it a little further, and as a result your spending may increase and you may start using your credit cards more freely, ultimately leading to more debt.
Your assets are at risk – While using a home equity loan or mortgage to secure your debt, you risk foreclosure if you default on the payments or are unable to make payments. Similarly, when you declare your home, car or any other asset as collateral while acquiring a consolidated loan, it’s a risk. That is so because failure to pay monthly installments for any reason will cost you your valuable assets.
You may need a co-signer – If you already have a big dent in your credit report due to previous defaults and don’t have any significant assets to be put forth as consideration for the loan, you need to find someone to co-sign the loan for you.
This list of pros and cons is obviously not exhaustive; therefore you have to be very careful while going through the process of debt consolidation. Don’t hesitate to take the assistance of a professional services firm at anytime during the process. A debt consolidation firm will help you determine whether or not you need a debt consolidation, they will create a debt consolidation plan for you and even negotiate the terms of the loan with your lender.