Introduction to Debt Consolidation
Debt consolidation has become exceedingly popular over the past few years, especially after the recession hit, and we all began racking up more debt. But, what many individuals fail to realize about consolidation is the fact that it is a not a quick fix solution to debt, and that oftentimes it can cause an individual to rack up even more debt.
In this staggering economy, many are trying their level best to come out of the wreckage of heavy debts. At this time many are using their debts just to survive, maxing out credit cards to cover their bills, the rise in transportation costs and maybe even to put the food on the table.
When you get into your hand just the enough amount of money to cover up all these costs, then it looks like the best option to get into debts on credit card and loans. But, after some time, it becomes clear that debt is not a good solution. Indeed, to be in debt is one of the 4 most stressful experiences.
In America, most people indents start feeling hopeless. They do not see any way out, other than bankruptcy. But before you file for bankruptcy, you should search a little online and find out other ways for to get out of debt.
Debt consolidation is one such way that can help you to fight with the unnecessary debts, without delving into bankruptcy. It is the ray of hope that you might seek at the end of your debt tunnel.
What Is Debt Consolidation?
This is usually levies, a type of loan that combines all your small payments under a single payment, to manage debts in a better way. If you are having access to a reputable third party to manage the debts, then you need to focus on one payment each month instead of concentrating on several payments.
Who Are Benefited From Debt Consolidation?
Anyone who is able to feel the oppression of the debts is surely going to benefit a lot. Say, you are stuck in a fierce payday loan cycle and that makes you choke and also make them trap in the heavy cycle of debts. Say you are having loads of credit card debt, and then you are looking a way out of it. Debt consolidation combines all your payments get compacted, and you just need to pay only one single payment. The different type of people, having different type of debts, can benefit from debt consolidation.
How Does Debt Consolidation Work?
Debt consolidation works by taking pieces of your debt, such as a credit card bill and a loan, and rolling the two together to give you a lower, single monthly payment. Sounds like a dream! Oftentimes, this single monthly payment can even be arranged at lower interest rates than you pay for the initial accounts themselves. So, say you have a loan with a monthly payment of $324 at 10% interest and another with a monthly payment of $543 at 11% interest.
Each month, prior to consolidating your debt, you would be paying $867 for these two loans. However, should you consolidate your debt, you might be able to lower your monthly payment for these two loans to $622 per month at 9% interest.
For individuals who are searching for a way to manage their money or cut down on their monthly expenditures can certainly see the benefit of consolidating their debt into a payment that is much more manageable.
Why is it a Dangerous Answer to Debt?
But, before you jump at the opportunity to consolidate your debt, it is important to understand that while your monthly payments are smaller and your interest rates are lower, debt consolidation extends the period of which you will pay that lower monthly price. For instance, if you were paying both of the aforementioned loans traditionally at $867 per month, you might be free of these two debts in six years.
But, once your consolidated your debt it can actually extend the amount of time it will take to pay them off by an additional three years, and this means you pay more in the long-term, even with a lower interest rate. So yes, your monthly payments are lower, however the extended money and time of these debts may not be in your best interests.
Another danger that accompanies debt consolidation is the fact that those who consolidate don’t often learn the error of their ways for creating so many debts. They often consolidate and then return to their reckless spending habits which put them into debt in the first place. There is no lesson learned, and good money management habits are not taught in this fashion.
While debt consolidation can be a great tool for those who are serious about paying off their debt and need a smaller monthly payment, it is not a fix all for the problem. It is important to approach this financial step with caution and the understanding that it can be dangerous if you do not understand the way it works. If someone tells you that you can pay one, lower monthly bill and at decreased interest rate, you always want to be skeptical and read the fine print.
Benefits of Debt Consolidation
As the first middle year comes to an end – it is useful to look at how you have changed and made efforts to start this new decade on the right financial foot. By looking at your debts and how the future would look if you could get those under control and working to help you rather than stacking up against you. A simple solution to assist you with the mounds of debt could be a debt consolidation loan.
Debt consolidation is the process of paying out all your current debt with one single loan. This helps turn the focus to one single lender rather than many, which can alleviate the financial burden greatly.
Choosing a consolidation loan often brings the benefit of a lower interest rate. Instead of paying various credit cards and personal loans that hold interest rates between 10-20%, consolidating may provide a lower rate, especially if you’re able to secure the loan within your home loan.
When you have a few different loans getting charged at high rates, the total interest paid monthly and overall will be greater than the interest incurred from a lump sum amount with a slightly lower rate.
Another advantage that can be attracted from debt consolidation is the ability to repay loans faster than leaving them in their original state. If you’re able to decrease your payments to one every month and the interest overall is decreased, your monthly payment requirement will be decreased as well.
With the reduction in amount owed, you can put the additional cash towards the payment, which will decrease your principal amount much more quickly and will reduce further the interest you end up paying.
Here is an example of how increasing the amount you pay each month on a loan can decrease the time and money spent overall. If you have a loan for $100,000 over 25 years with an interest rate of 6.15% you will end up paying an additional $96,000 in interest at the end of the 25 years.
By increasing your monthly payment by $100, which equates to $25 per week, you can save $28,000 in interest and your loan will be repaid 6 years and 5 months earlier. That is a massive saving on time and money!
To sum up, debt consolidation has 3 key benefits:
1. Reduction of Repayment Period
Debt consolidation will allow you to free up additional disposable income by giving you a lower interest rate, which means the amount owed is lower. With the additional income, putting it back towards the caveat loan, will pay the loan down faster.
2. Save Money
With a debt consolidation loan, you are able to save money through the lower interest rate. Typically, many credit cards hold rates upwards of 15% whereas with debt consolidation you may get a rate as low as 6.6% which is a difference of over 9%. This difference can end up saving thousands of dollars.
3. Save Time
A debt consolidation loan allows you to make one payment a month rather than several payments. Additionally, through the option of using the increased income to pay down the loan, you can take years off the duration.