There are several debt-relief and debt management processes. They usually include budgeting, leading a simple life within your means, opting for debt relief, or debt settlement, or debt management or even bankruptcy. Despite the fact that there are so many avenues open to you, when in debt, generally, you would be opting for consolidation of debts. The appropriateness of a consolidation loan depends on many factors including your credit score, financial aspirations & goals and also if you are conforming to a budget.
Do not consider using a consolidation loan as a mean to ease your financial situation for the moment or just to have a better way of life for some time. Instead, it would be fruitful to come up with a budget, ensure that you are spending a lesser amount than your income. Remember to come up with an effective plan specifying your financial objectives and where you would like to be in the next 5 to 10 years. This plan should lay out the strategies you would be adopting to get out of the financial crisis, ways to save enough for achieving future goals and aspirations such as investing, going on vacations, buying a home etc.
What Do You Mean by Consolidation of Debts?
Debt consolidation is the process where someone would be obtaining a new loan for paying out multiple smaller loans, bills, or debts that he seems to be presently making payments on. He would be getting his multiple debts together into one single combined loan that too with just a single monthly payment. As the process involves bringing together a number of debts and then combining them into a single loan, this process is referred to as the consolidation of debts. This, therefore, is nothing but the process of combining loans into one bigger loan which is repaid every month. Consolidation of debts is often regarded as the most effective and significant way of getting a grip on your finances.
Reasons for Consolidation of Debts
There are various reasons why people opt for consolidation of their debts. However, the reasons would be varying from one person to another. Here are some common reasons why people consolidate their debts.
To Know the Exact Amount You Owe
Practical people realize the importance of knowing the exact amount they owe from the diverse creditors. It is pretty challenging to keep track of everything if you are having a variety of loans including personal loans, bills, student loans, credit card loans and a mortgage. It would be quite tricky to remember all the minute details of all these loans and debts. So, it is a good idea to consolidate your debts so that you have a clear picture of your financial state and you would know exactly how much you actually owe your creditors.
To Cut Down Monthly Interest Rates
When multiple small loans are effectively consolidated into a single loan, you would end up paying lower interest rates. In the majority of cases, people get consolidation loans at lower interest rates as such this process makes the monthly payments definitely more manageable. Remember that some consolidation plans would be quite exorbitant so you must keep shopping around.
Desire to Keep Your Finances under Control
Consolidation is one of the more effective solutions for finance management and mitigation of debt. If deployed correctly, it will pave the way for you to regain control of all your finances and also give you a perspective into your debts and spending habits so you can alter them for a happier life.
Restructuring Repayment Schedules
The most exasperating thing about juggling several debts is the fact that each of them has a different due date every month and also a different interest rate and structure. There is always the off chance that you forget to or are unable to pay one or a few of these, which would entail late fines as well. This is where debt consolidation comes in as it replaces all your debts with a single loan, a single due date, and a single interest rate. There are no fines for forgetfulness and the fees on your bank account are reduced too.
Does Not Affect Credit Rating
Consolidating your debt is very different from all other management options because it has no effect on your credit rating. There are no accounts with balances falling behind due to the single monthly bill.
If you are ready and willing to turn the tables on your financial issues and regain control and freedom in your life, consolidating your debt is certainly a very solid and reliable option. It is not, however, a blanket solution which will guarantee perfect outcomes in every single situation, so you must know what you are getting into or seek expert advice before signing up.