subject: To Consolidate Debts or Not? [print this page] A very big question that looms large on debtor community is whether debt consolidation is a good alternative or not. Debt consolidation is taking a new loan that repays all the small debts that you have incurred before. After you consolidate all your debts into one loan you would pay only one instalment per month.
Debt consolidation may mean two things: one, you may reduce your monthly payments by extending your repayment period and two, a fluctuation in the interest rate is inevitable because you have taken a bigger loan and interest rate may be hit.
On the other hand, if you were paying higher interest debts compared to your debt consolidation loan you will be paying lesser interest than before. The advantage as far as your interest rate is concerned is, you will have a fixed interest throughout the payment period.
If you have opted for a debt consolidation you are opting for a secured loan with an asset as collateral. Should you default on repaying this loan your asset will attract foreclosure as a repayment of the loan.
Reasons for debt consolidation:
Simplifies your finances by allowing you to make one payment
Protects credit rating by avoiding non payments
Reduces monthly instalment to one low payment
Has a lower interest rate while compared to credit cards
Has a final date of completion of the loan
Steps to take if you are planning to consolidate your debts:
Make a list of all your debts not forgetting the student loans, vehicle loans etc
Calculate the total minimum amount to be paid on all the loans
Research thoroughly and select the best debt consolidation loan available
Consolidation loans can be secured (against assets) or unsecured (personal loans)
Find the lowest rate line of credit that offers ample credit limit to cover the entire debt
Apply for loan that should consolidate all your old debts
Do not start the overspending again; stick to your budget
Start a buy by cash policy and stick to this
Continue with repayment of debt consolidation loan
A debt consolidation loan does not set any limits on which debts you can consolidate. The advantages of debt consolidation may be longer repayment plan, lesser interest rate and a single instalment. These loans also ensure peace reducing the stress of balancing payments for many credit cards. However, the flip side of these loans can mean an increase in total amount if you repay slowly. Such loans do not offer flexibility normally which in credit cards is allowed. Credit cards have a flexibility of repaying as low or as high as long as you pay the minimum balance. Debt consolidation loans can also create a false feeling of a single debt and may tempt you to make new debts.
Debt consolidation need not necessarily be done through a loan but you may opt for a debt consolidation program. In this a third party debt counselor works with you to pay down the debt you have by negotiating lower interest rates.
To Consolidate Debts or Not?
By: JohnKevin
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