If you have smaller debts that have gotten more significant than you calculated, one of the things you can do to make your financial life easier is to consolidate them. Debt consolidation means that all of your loans and credit card balances will be rolled into one account.
By doing so, it will be easier for you to pay them off since you don’t have to deal with their interest rates and repayment terms. Of course, this is not the only reason why you should go ahead and consolidate your debts.
There are several reasons you should do so, and we’ll discuss them.
What is Debt Consolidation?
Debt consolidation is the process of taking all of your debt or outstanding balances like credit card balance, auto loans, personal loans, etc., into a single account.
Most of the time, people tend to use the loan that has the least interest to use as a consolidation loan. This is because when consolidating a loan, the interest rate would depend on the loan you’re using to consolidate your debt, and home loans tend to have small interest rates.
However, using your home loan as a consolidating loan is risky. This is because when you default on your home loan, you will lose your home. As implied earlier, you can use any loan you have outstanding, especially one that has the least interest rate and better repayment terms. Just remember that each type of loan, when used as a consolidation loan, has its pros and cons. Hence, research is necessary before doing so.
Of course, there are benefits as well when you consolidate your loans. One of the main benefits is that you can take advantage of a low-interest rate loan to use as a consolidation loan. Also, since you have to deal with a single loan only, repaying it would be more comfortable. Not only that, but the paperwork such as the application and approval will only be for a single account, which is convenient.
Let’s talk more about the reasons why you should consolidate your loan.
Lower Interest Rate
If you opt to get a consolidation loan from an alternative lender, it might be a good decision. Alternative lenders are flexible, meaning that they are mostly willing to negotiate with your interest rate and repayment terms if you have a good credit score, of course. Let’s say you want to opt for a lower interest rate and shorter repayment period. This means that you will be paying off all of your debts in a short amount of time.
It also means that if you and your lender compromise your repayment terms of your choosing, budgeting and dealing with the loan will be much easier for you. With the extra money you have, you can either save it up for the next repayment or spend it on other things.
Streamlined Repayment
A typical consumer has more or less than five financial accounts at the same time. This could range from medical expenses, personal loans, auto loans, mortgages, and so on. With this, it’s unavoidable to make some mistakes that would lead to debts from different accounts. Trying to repay all of them would be a challenge.
However, if you use a consolidation loan, you won’t need to keep a list of debts to memorize every financial account you have. Rolling them into a single account would make your payments streamlined, which means less hassle and stress because you only have to remember a single repayment every month.
Shoot Down Multiple Balances at Once
One of the main benefits of consolidating your debt is taking down multiple debts at once. Debts that you regularly pay with the minimum payment can go for years on end, which also can grow into immense debt. Imagine having multiple of those, and you would even be more stressed out.
That said, by consolidating them into a single account, you can shoot down multiple debts at once, avoiding them from growing into bigger debts. This would also shorten the length of time you have to pay for them since a significant portion of your repayment would go into their principal amount.
Credit Improvement
Our credit score is essential in our lives as borrowers. Without a good credit score, you’ll find it hard to get approved for most loans, which will force us to apply instead for loans with higher interest, further burying us with debt. That said, you should always look to improve your credit score.
Debt consolidation is an excellent way to improve your credit score because you’ll be merging all your debt into a single account, which will result in you having more available credit. This will, in turn, lower your credit utilization ratio, which will result in you gaining some points in your credit score.
Summary
Debt consolidation is one good way to make your debts much more manageable. However, there are some drawbacks if not managed properly. Hence, you have to research first if you want to know if debt consolidation is a solution to your financial problems.
