Financial experts and internet marketers usually throw the phrase “debt consolidation” around while describing what it is. When you stop and think about it for a minute, each definition has something in common. Understanding what debt consolidation means along with how it works will help people understand the difference between having multiple loans and consolidating their debts into one loan.
In a simple definition, debt consolidation is the method of taking out one loan to pay off multiple loans. Consolidating your debts is often a good choice if you are trying to consolidate credit card debt. For individuals with multiple credit cards, Credit Card Debt Consolidation is highly recommended. This is so because it becomes difficult to manage them each month. It is all too easy to lose track of which card has the amount owed available on it and how much you can spend until your bill arrives in the mail.
How does Debt Consolidation work?
Consolidating debt is also something that will help you pay off your debts quickly. You will be spending less money each month by paying one monthly payment. That way, you will not have to make multiple payments throughout the month to various creditors. This can also save you time and frustration in trying to make several different individual payments on time every month.
Here is what to do if you are considering this option to deal with your loans.
- The first step to debt consolidation is to contact your creditors. Ask them if they would be willing to lower your interest rate on all of your credit cards. While the rates may look high, you have a better chance to lower them than with one credit card.
- Find a responsible debt consolidation company that can help you lower those payments. The company can help you consolidate them into one monthly payment. Therefore, they will pay for each of those credit cards for you.
The best way to get the most for your money is to consolidate your high-interest credit cards into one card with a very low annual percentage rate (Apr). This way, you only have one payment each month. However, the extra money will be applied to the loan that has the highest interest rate.
If someone has five different credit cards with high amounts of debt on each, they can consolidate their debt by getting one new line of credit that will pay off all the old ones. It is like applying for a loan to pay off all their other loans.
Consider, for example, that Joe has five credit cards with $5,000 in debt on each of them. When he consolidates his credit cards using one new loan, his monthly payments will drop considerably since the amount owed is spread out over a longer period of time (e.g., 5 years) resulting in lower monthly payments. That way, his loan burden is easy to track.
Why consider debt consolidation
Many people who struggle with debt want to get rid of it all at one time, but the reality is that is not always possible. Debt consolidation comes into play when a person cannot pay off his or her cards in full at one time but wants simplicity and peace of mind by living without debt. It also helps people who are upside down on their mortgages, have undergone a recent hardship or lost a job, or have recently had to purchase an expensive item like a new car.
Debt consolidation is the process of taking several different debts one person has and combining them into one payment plan that will cover all the bills. The individual then pays one monthly payment to this new company. This way, he or she pays off all of their debts. Therefore, instead of making several payments each month to different creditors, there is only one loan to pay.
When people are deep in credit card debt or have money troubles, they get to a point where they cannot pay their bills on time. This is so because there is not enough money left over after making the different loan payments.
So, why is debt consolidation important? Here are important points to look at:
- The main benefit of debt consolidation is that it reduces the number of bills a person has each month.
- Debt consolidation also allows for better budgeting and more savings.
- The option of consolidating debts relieves stress due to worrying about all those multiple bills.
- Consolidation of debts gives people with financial difficulties breathing room. Therefore, they can restructure their lifestyle without having to make several payments each month.
- Most importantly, debt consolidation allows them to focus on other priorities.
- Debt consolidation is a great way to save money by receiving a lower interest rate on personal loans. This allows you to make one low monthly payment. In the end, you reduce the chances of late fees or missing due dates because of your busy schedule.
Close alternative to Debt Consolidation
The typical debt consolidation idea involves taking out a new personal loan, to pay off all of your other outstanding bills. This allows you to make one single payment per month that covers everything owed on the loans. However, you borrowers can consider another option – credit factoring.
Credit factoring is another solution that may be able to help you with your current debt situation. Rather than consolidation, this method involves buying debts by an outside company that pays off all of your bills in return for a percentage of your future earnings. However, this option might not work as well if you do not have a steady income.
Debt consolidation is not a new idea and has been around for years. However, it has not been until recent years that it has gained popularity. If you are using debt consolidation, you must use it properly. You do not want to end up in debt again. Make sure you understand what the consolidation company is offering and check their qualifications first before signing any contracts.