Debt consolidation helps you to manage your multiple bills and boost your credit score gradually. However, this is a very broad term and you need to know everything about the debt consolidation options to make smart choices in your financial life. We will discuss 10 things that you need to know before consolidating all bills here.
10 Facts you must know before getting debt consolidation help
Let us find out how this debt relief option can help to solve your financial problems. Here are the 10 facts that you need to know before you consolidate all debts.
1. Consolidation program is different from a loan
There are 2 debt consolidation options – program and the loan. In a program, the debt counselor consolidates all debts on your behalf. The counselor negotiates with your creditors to change the terms and conditions of your payment plan.
In a debt consolidation loan, you borrow a new loan to repay your multiple debts instantly. You have to make only single monthly payments.
2. You can easily change your payment date
Your payment date depends on your loan term. When the loan term is long, you pay less each month. When the loan term is short, you pay more every month.
Your loan term and payment date affect how much you pay or save on the interest. A short loan term leads to high monthly payments. But this helps you to save a lot of money on the interest later. On the other hand, a long loan term lowers your monthly payments. But this stretches the balance and increases the total interest you pay.
A consolidation loan costs a lot more than the original debt, and this is why it’s better to opt for a consolidation program where you get a new payment date based on your revised repayment plan. You have to remember only one payment date instead of many.
3. You can lower your monthly payments
The debt consolidation companies have a good relationship with creditors and banks. This is a great advantage for you when your repayment plan is approved. The debt counselors negotiate with creditors for a lower interest rate and affordable monthly payments. Their relationship with the creditors helps a lot during the negotiation process. They can easily convince the creditors to lower your interest rate and monthly payments.
4. You can build your credit
A debt consolidation program helps you improve credit gradually. When you make monthly payments on your debts, it helps to decrease the balance gradually. This helps to build a positive credit history.
When you take out a consolidation loan and pay off your multiple debts, your credit utilization ratio becomes zero. This helps to boost your credit score.
5. You have to pay a fee
Debt consolidation companies charge fees. There are several companies that don’t charge fees. But those are non-profit companies. However, there are some companies that charge a service fee of $25. Check out the fee structure of a company before signing a contract with them.
6. You have to work on the root cause
Debt consolidation works only on the symptoms. It doesn’t work on the root cause. It helps to simplify your monthly payments. But it doesn’t solve the reason why you’re in a financial crisis. If you love to splurge and don’t change your habit, a consolidation plan won’t help you. Your financial problems won’t be resolved. You have to find out the reason why you have so many delinquent accounts.
7. The quality of services may differ
You must be extremely careful about the organization you work with. Choose an organization that is accredited with the BBB or the Financial Counseling Association of America (FCAA). Be picky when you’re selecting an organization.
8. Your monthly payment is consistent
You have to pay only a fixed amount every month. So you can live in peace. You have to set aside only a fixed amount from your monthly income to pay off your debts gradually. However, if your financial situation changes and you can’t afford to make the payments, then inform the debt counselor about it. He will re-negotiate with your lenders and modify your payment plan.
9. One late payment can lead to a rate hike
This debt solution can be expensive if you miss your monthly payments. When you miss your monthly payments, the consolidation plan is canceled. You are forced to get back to the old repayment term. This means you have to pay high-interest on your credit cards again. You may also have to pay a high fee.
10. You can’t use your credit cards
When you’re in a debt consolidation plan, you can’t use your credit cards. You have to follow the repayment plan to clear your debts. When you’re under this plan, the creditors will freeze your accounts. So you can’t depend on credit cards for covering your emergency expenses. This is a smart way to avoid incurring more debts.
The best debt consolidation advice you can get
Don’t opt for a consolidation loan because there is no guarantee that you’ll get the lowest interest rate. Several factors decide your interest rate. For instance, your credit score. If you want to borrow a loan at a low-interest rate, you need to have a good credit score.
Think rationally. Most people decide to consolidate all debts when they have too many delinquent accounts, which brings down the credit score. Will they qualify for a low-interest loan then? Possibly not.
The other way to qualify for a low-interest loan is to pledge a collateral against it. This is again another problem. Are you ready to lose your home or a car just for the sake of a loan?
You can always try to sway the lender with your good behavior and try to grab a low-interest loan. But there is no guarantee that the lender will agree to issue a low-interest loan.
If you need to know more about debt consolidation options, browse the website and related articles to repay bills conveniently.