Debt consolidation is a financial strategy that merges several financial bills into one debt that gets paid off through a management program or loan.
Debt consolidation is useful when the debt is of high interest like the credit card. It needs to reduce your monthly repayments by lowering the rate of interest on all your bills, which make it easy to pay the debt off.
The option of debt relief untangles the mess that consumers face each month when they are struggling to keep up with several bills from various card companies and different deadlines. In its place, there is a single payment to one source each month. It also saves money at the end of the day.
There exist two primary forms of debt consolidation – signing up for a debt management program or taking up a loan. It is up to you to decide on the method that fits your situation.
You can also call this credit consolidation or bill consolidation. Consolidating debt should help get you out of debt very fast and improve your credit score.
How does it work?
It works by lowering the rate of interest and reducing monthly payments to a price that is affordable on debts that are unsecured like credit cards.
The leading step towards debt consolidation plans is calculating the total money you pay for your cards monthly and common interests paid on the cards. It provides a baseline for purposes of comparison.
You will then have to look at the budget and add spending on basic utilities like transport, housing, and food.
How much money are you left with?
For many individuals, there is always enough left to handle the budget and help them pay their debts. However, motivation and effective budgeting are never evident when individuals fall behind on bills.
And this is where debt management programs or debt consolidation loans step in. All of them need one payment monthly and gives you time to track the progress of removing debt.
Will some calculations and research inform you if a debt management program or loan will be of more help in paying the debt?
Using a loan to do Debt Consolidation:
The standard method of doing debt consolidation involves getting a loan from the bank, online lenders, or credit unions. The loan has to be large enough to clear unsecured debt at once.
The loan gets paid with monthly installments at the negotiated interest with the lender. The period of repayment is usually five years, but the amount of benefits charged is the crucial element.
The lender will take a close look at your credit score while determining the interest rate charged for the loan. In case you are falling behind with your debts, it is likely that the credit score will tumble.
In case the debt consolidation interest is not lower than average benefits you are paying on credit cards, then the loan will not be doing you any good.
There are other alternatives to loans like personal loans or equity loans, but none of them will help if the rate you are paying is long and does not make sense.
Consolidating Debt without a Loan:
There is a possibility of combining the debt and reduce installments without another loan. Agencies that do non-profit counseling provide debt consolidation via debt management programs that do not require you to take credit.
In that place, the non-profit agencies work with companies of cards to reduce interest rates and lower monthly repayments to a level that is affordable.
The consumer will send payments to the counseling agency that then distributes the funds to agreed creditors. The agency may tell the firm to waive over-the-limit and late fees.
This solution is not quick. Programs of debt management take up to five years to manage the debt. If you miss one payment, they may revoke the arranged concessions on the monthly fee and interest rates.