One of the main reasons consumers opt for debt consolidation is to reduce debt along with saving money as much as possible. This is the most attractive benefit of debt consolidation method, which makes it consumer friendly. But there are also other hidden benefits that make it useful both financially and psychologically.
Paying off debts along with saving a lot from interest payments is the most lucrative benefit of debt consolidation. You can pay off your principal amount more quickly by keeping the same monthly payment, with a lower interest rate. It means the debt balance declines faster than the previous interest rate.
The total interest paid can also be less if a lower interest can be applied to the debt through debt consolidation. You may shorten the amount of time needed to pay off the debt. But make sure you do not build up more debts in the meantime.
Apart from these benefits, there are some less commonly known benefits I would like to discuss here:
Uncommon financial benefits of the debt consolidation method
1) Handling multiple debts seamlessly
The Americans have 7 credit cards in their wallet on an average. Apart from that, they also have other debt obligations like a cell phone payments, student loan installments, short pay mortgage balances, etc. These household debt payments can add up per month quicker than you may imagine. So, you must gather enough money to pay off all these debts in full. Making payments to all of these debts can be difficult, as you may have to allocate separate money to handle separate debts each month. Choosing debt consolidation help you to manage those multiple debt payments in the easiest way possible. As a result, you’ll end up tracking fewer transactions per month.
2) Chances of missing payments
It is related to the above mentioned financial benefit of debt consolidation. With too much or multiple debt payments, it is quite normal to forget making payment once in a while. But missing a single minimum payment may cost you a lot, and you might be charged with a good amount as penalties and fees. By consolidating your debts, you can reduce the number of debt payments and easily keep track of the payments.
Unknown psychological benefits of debt consolidation
Few borrowers may experience emotional trauma due to their debt issues. Falling into debt is not good, but the situation gets critical when you can’t pay off the debt at all. It will have serious effects on your emotional well-being. Being able to handle your debt rather than letting the debt handle your life will be a stress reliever and it will give you a positive effect mentally.
Once you start paying off your monthly bills on time, it will give a boost to your confidence. You’ll be relieved from stress as you know that no debts are forgotten to be paid. When every bill will be paid on time, gradually you’ll see a clear picture of your financial situation and have the confidence to manage your remaining debts. As soon as you can pay off your old debts it will help you to take other big positive steps.
Due to poor debt management, you may experience stress and depression. But, poor debt management can also have few physical harms too. Stress is deeply connected to health conditions such as obesity, heart disease, Alzheimer’s disease, diabetes, depression, gastrointestinal problems, and asthma. So, by reducing your debts you may reduce stress and improve your physical health.
Normally people can opt for the DIY debt consolidation options like a balance transfer method to consolidate their credit card debts. But for another type of debts, there are some non-profit organizations who can help borrowers by providing specialized debt consolidation services. Borrowers may also opt for a personal loan a.k.a debt consolidation loan and pay off all their debts once and for all.
Now, let us see the benefits if you use the debt consolidation method to pay off your debts.
1. One payment to manage all the debts
To make multiple debt payments you might have to face difficulties per month. It is because dealing with multiple payments is quite tough no matter how much you are organized.
It is quite hard to manage enough time to manage most of the multiple payments. You need to remember all the payment amounts, due dates, account balances, grace period, etc. to organize all the payments accordingly.
If you choose a debt consolidation method, you may easily pay off all debts immediately by taking out a credit consolidation loan and pay back all the creditors with one regular payment. Your repayment period might be longer, but your overall interest payment will be lower than usual.
2. Debt stress buster
It is too stressful to pay off multiple debts every month. You might experience a mental trauma if you have to face multiple creditors at a time. You might have received multiple creditors calls a day or replied abusive collection agencies frequently. This emotional pressure can make you mentally depressed and you may experience anxiety.
Opting for a debt consolidation method may help to solve your problem. If you are handling multiple creditors with multiple payments every month, you may consolidate all the debts by taking out a debt consolidation loan. It is one of the best ways to manage your debts if you are in knee-deep debt. Do not forget to make the new loan payments every month.
3. Reduced interest payments and increases savings
Credit card users may experience huge credit card debts and can’t afford to pay off such a big load due to its ever-increasing high interest. Making monthly payments on credit cards can be difficult if you constantly make minimum payments and incur more interest.
The situation may become worse if the minimum payment gets too high to afford every month.
So, to stop incurring more interest, you may transfer your high-interest credit card balances into a new low-interest card. Many credit card companies may offer you a 0% introductory rate balance transfer cards. You may transfer your high-interest credit card balances into the new card and get the benefit of 0% rate for 12 months or more.
A balance transfer card with a 0% APR, 0 balance transfer fee (if you manage to get one), and 0% interest on new purchases (if you can negotiate with the bank) can be a boon to consumers suffering from huge credit card debts. However, 0% interest on new purchases may also trigger impulse buying and increase your existing credit card debts.
4. You can set up a fixed repayment schedule
For consumers, it is very hard to handle revolving debt, such as credit card debt. If you continuously use your credit card and make the debt payments as well, you might get into a debt cycle. This debt cycle on your credit card may hide any progress you make after paying off your existing credit card balance.
By taking out a low-interest personal loan (debt consolidation loan) you may consolidate your existing debts. The benefit of a debt consolidation loan is it will help you to set up a fixed monthly payment with a fixed interest rate. That would make your monthly payment easier to manage. Apart from that, you couldn’t add up a revolving debt balance on your personal loan every month (unless you don’t make any of the monthly loan payments). Make sure you don’t add up further credit balances on your paid-off credit cards.
5. Keeps your credit score unharmed
When you are struggling with your multiple debts and can’t make monthly payments, your credit score might get a hit. Missing monthly payments, overutilization of your credit, and applying for too many credit accounts may damage your credit score significantly.
Once you pay off your debts using the balance transfer method (credit card debts) or by taking out a consolidation loan, your credit accounts will be immediately marked as paid. The only debt on your credit report would be the new 0% credit card or the consolidation loan.
Your outstanding balance would be lowered as long as you make the on-time single monthly payments. You must keep up with your due payments and make additional payments if possible. This way you can potentially improve your credit score.
Debt consolidation option is good if you use it wisely.
If you take out a consolidation loan to pay off your existing debts, you must avoid incurring further debt. A credit consolidation loan is normally an unsecured personal loan with a relatively low-interest rate. But sometimes people may choose HELOC or mortgage refinance option to pay off their debts. In that case they have the risk of asset loss on those secured loans. So, don’t forget to make monthly payments on time.
Managing credit card debts through a balance transfer method is good. But you must remember that your debts have been transferred to another account, but not yet paid off fully. Make sure you pay off the entire balance before the initial offer period ends, else you’ll come back to ground zero and have to repay the remaining balance on a much higher rate of interest!
Opting for a professional debt consolidation program may come in handy if you seriously follow the tips= suggested by that company. Apart from that, without keeping your finances on track it won’t be possible for you to become debt free. So, make a solid budget to keep your finances on control and avoid further debts.