How debt consolidation is the best option to revive your financial life
Whether you are standing on the edge of bankruptcy or just trying to fix your finances, you can’t ignore the importance of debt consolidation. But how can debt consolidation help you get a second chance at reviving your financial life? Let’s check out.
Before knowing the advantages of debt consolidation, let’s have a look at the categories of debt that can be consolidated or can’t be consolidated through a debt consolidation service.
Debts can be categorized into two main parts which may affect your financial life. They are as follows:
1. Secured debt
The debt will be considered as ‘secured’ when you have added one of your assets as collateral. If you take out a loan to buy an asset and the bank has a legal claim on that asset until you pay off the loan, then it is also considered a secured debt.
If you are having problems making your payments on a secured loan or mortgage, your options are limited. You can’t keep the assets without paying back the debts in full. It is because the lender has the authority to take over and sell your property if the debt is not paid. The most appropriate examples of secured debt are mortgages and car loans.
2. Unsecured debt
Unsecured debt is such debt that isn’t attached to an asset, like a car or home. The most common examples of unsecured debts are credit card bills, medical loans, personal loans, utility bills, etc. Unsecured debts may become a headache if you fall behind on payments. Though your lenders or creditors don’t have any direct claims on your assets and cannot repossess or foreclose your home, they can yet file lawsuits against you in federal court.
Unsecured debts can be managed through different debt-relief options such as debt management, debt consolidation, and debt settlement to help you clear your debts relatively faster and for less money (in debt settlement option).
Now let us talk about how debt consolidation can give you another chance to revive your financial life.
Debt consolidation allows you to combine several debts, such as credit cards, loans, and store cards. You may consolidate these debts by using various debt payoff strategies like debt snowball, debt avalanche, debt tsunami, balance transfer (for credit cards only), debt consolidation loan (personal loan, loan from relatives, home equity loan), etc. It’s a very common and practical approach to make your repayments easier. You may also track your money and get a clearer view of how much you have paid to date.
However, debt consolidation is not always a suitable option in all situations. It is important for you to consider whether or not consolidating your debts will be beneficial for you. You must also decide which method is best for you, as in your situation, a balance transfer method might be good rather than opting for a debt consolidation loan.
Here are some key benefits in which a debt consolidation method will help you to tackle your unsecured debts and give you a second chance to revive your financial life.
1. Provides a single payment option
If you’ve more than one credit card or personal loan, you’ll understand how complex it is to track different repayment dates. With every new debt, the process will become more complex. As a result, the process of tracking and fulfilling repayment obligations becomes too difficult to sync with your income and expenses.
Consolidating your debts into one single payment will give you the privilege to reduce all your existing repayment schedules. This way you can cut off the total number of monthly payments into an easier, consistent, one payment. Depending on the consolidation option you choose, you can reschedule your payment date as per your comfort.
2. Gives you easy repayment tenure
Through the debt consolidation option, you can take out a single loan and pay off all your existing unsecured debts. If you have multiple credit cards and credit accounts with huge balances on each of them, by taking out a debt consolidation loan, you can pay off these debts all at a time. Different loans have different deadlines to pay off. When you’re refinancing all those loans and credit cards into one, you are removing all payment deadlines, just keeping one for the new loan.
You can easily make one payment every month toward your loan. This will allow you to target only one debt and get it paid off as soon as possible. Most importantly, if you are struggling with your monthly debt payments, you may ask your lender to set up an easy repayment option (with a lower monthly payment or a longer time limit). This way you can lower your monthly payment and simply put all of your extra money into this single debt account.
The overall interest might be much more expensive than you think, but it’ll give you breathing space to cope up with your monthly budget.
3. Reduces the cost of debts
The cost of debts mainly denotes the fees and the high-interest rate. Through a balance transfer method, you can get rid of high-interest credit debts along with fees. On the other hand, a debt consolidation loan may also help you to save thousands as its interest rates are quite lower than credit card debts. This process is beneficial if you have multiple credit cards and unsecured loans.
If you are thinking about consolidating your debts through the balance transfer method or by taking out a debt consolidation loan, consider the number of fees you may have to pay for the existing debts. You must also check whether or not your existing loans are about to mature. If you’re about to pay them off completely, there’s no point in going for consolidation. It would be much productive if you could just focus on being current on your payments.
4. Reduces stress caused by debt
Will debt consolidation help you to reduce stress? The answer is a big YES.
Debt is one of the biggest and notorious factors that may cause severe stress in our life. After falling into a debt trap, you might be continuously thinking about debt. Too much worrying about your huge debts can create stress and block normal function in other areas of your life.
By consolidating your multiple debts, you can literally reduce your stress and achieve mental peace. You use a debt consolidation loan to pay off your existing debts and get a big relief from the mental stress. Being a stress-free individual you can focus on important aspects of your life and avoid worrying about your debt.
5. Causes of other health conditions
You can avoid stress by consolidating your debts. But do you know that debt consolidation will help you to cure your other health issues too? I guess not.
By successfully enrolling in a debt consolidation program and getting out of your debts may have great physiological benefits. Stress is connected to various deadly health conditions such as heart disease, obesity, high blood pressure, diabetes, Alzheimer’s disease, depression, gastrointestinal problems, asthma, and many more.
So, if you choose to consolidate debts through a debt consolidation program, it’ll reduce your stress and make you feel better mentally and physically.
6. Sets an end-date for your debt
One of the most amazing benefits of eliminating your debts with the debt consolidation method (practically with an unsecured personal loan) is its fixed end-date. It is built into the unsecured loan which you are taking out, which denotes you have a fixed goal to achieve by paying down your new debt.
By taking out a debt consolidation loan, you’ll be able to compress all your old debts, their late fees (if any), and other associated charges into a monthly payment with a fixed end-date. It’ll be easier for you to understand exactly how much you owe and how much time you have to pay that loan off.
If you want to take out an unsecured personal loan to consolidate your debts, you should consider a loan with a short tenure; it might come with higher repayments, but it’ll charge you less interest overall.
7. Stop unwanted collection calls
Another great benefit of taking out a debt consolidation loan to consolidate your debt is that you can avoid abusive, harassing debt collection calls, once and for all.
You might have faced this situation earlier. Once you are in debt, and you are behind on your monthly debt payments, the creditors might turn your account over to a debt collector. Then a debt collection agency will start making your life into a living hell. They’ll start making multiple collection calls every day. These calls can be abusive, insulting, and even threatening. People usually can’t handle this stressful and annoying situation and most of the time they surrender to the collection agency.
So, when you take out a debt consolidation loan and pay off all the outstanding debts, you are also stopping these collection calls.
8. Helps you with your credit score
Can debt consolidation help improve your credit score to improve? Yes, surely. The easiest way to analyze this fact is to consider yourself continuing with your current financial situation against taking out a debt consolidation loan.
In this situation, where you have multiple debts to repay but you’re not able to make the required payments, your credit score might get a hit. On the other hand, if you opt for a debt consolidation option by taking out a consolidation loan, you can make payments to all of your unsecured debts. So, the only debt showing unpaid on your credit report would be the new consolidation loan.
If you make the payment on time regularly, the outstanding balance of the consolidation loan will be consistently reduced. You can make additional payments on the loan if you want to. This may help you to improve your credit score, as being regular on your debt payments gives you a good payment history which comprises 35% of your score.
Apart from that, once your debt is paid off and updated as “Paid in full” in your credit reports, it’ll leave a positive effect on your credit score too. Moreover, it’ll also boost your credit score by reducing your total credit utilization (makes up 30% of your total credit score).
9. Reduces overall interest rate
Another important benefit of using a debt consolidation loan to consolidate your debts is that you can save a significant amount of money on interest. Most people who are suffering from debt problems have several credit cards with higher interest rates. Usually, credit card interest rates are much higher than the other loan interest rates. By getting a debt consolidation loan, you will be able to get a cheaper interest rate and can save a decent amount on your monthly payment as well as over the life of the loan.
Can debt consolidation help with payday loans? Of course. You won’t believe, payday loan lenders also charge too much interest on their short-term loans, practically 400% to 500%. So, debt consolidation is a very good option to get rid of those high-interest payday loans too.
So, if you are thinking about choosing a debt consolidation option for paying off your debts, you must consider the above mentioned key benefits to select the best method. But don’t take out further credit before you pay off your existing debts.