You Need to Know About Debt Consolidation
While the motivation behind borrowing money can be justified, you have to be very careful not to let the situation get out of control. Do not be tempted to borrow too much than what you can afford. Provided you qualify for a loan, lenders will always be willing to approve your applications because they are in business, and that is how they profit. However, the fact that you qualify for a loan does not mean you should take it. It is so easy to get overwhelmed with debt. That is why it is always advisable to borrow only when it is absolutely necessary.
Nevertheless, the situation may be out of hands for the reasons you couldn’t avoid. Life has a lot of turns, and some come with positive surprises and other negative ones. An event can occur and ruin your financial status. Today many people live in debts. Some have even borrowed too much they can afford and turn to friends and family members whenever they are supposed to make payments. You can successfully manage your debt and regain control over your finances. How? In this blog, we are going to discuss one of the most effective strategies for managing debt – consolidation.
Debt Consolidation Introduction
This is a technique of managing debts by combining all the loans and having them replaced by one huge loan. One of the main reasons why individuals consolidate debt is to end up with low interest rates and accelerate the repayment of the outstanding loan. We all agree that making one payment each month is simpler and manageable than having several of them. Moreover, when loans are consolidated, it is easier for an individual to keep track of his or her debt obligation. Consolidating debt involves taking one huge loan and using the funds to repay all your existing loans. You will be required to make only one payment
Consolidate Your Debt – How to Manage it?
Making one payment every month is appealing to everyone. However, the low interest rate you end up with is what makes debt consolidation attractive. But is it always beneficial to consolidate debt? Not at all! You are supposed to make this decision when you are confident there is financial prudence in it. When you consolidate your debt, the following happens:
Debt consolidation is reflected on your credit report
It is essential to keep in mind that debt consolidation never eliminates your debt obligation. Instead, it only lessens the burden. Whenever you consolidate debt, a hard inquiry on your credit is pulled for review. This information will be reflected on your credit score for two years.
Your Credit Score Drops
Whenever a hard inquiry is made, your credit score drops by at least five points. So then, while thinking of consolidating a loan, expect a drop in your credit score. While the information will be reflected on your credit for two years, the effect can only be felt for up to one year. However, in case the debt is settled rather the being paid off, the information remains on your report for as long as the account is reported. This usually takes sevens right from the moment the account is settled.
Debt consolidation often leads to smaller cash outlay every month. This is beneficial in away. You cannot opt for another loan. Besides, the savings you make from the payments can help you in times of emergencies. In fact, some people consolidate and start a saving plan.
As we mentioned earlier, consolidating means you are replacing all your loans with one larger loan. Instead of making several payments, you will only be required to make a single payment. This lessens the burden of the debt and makes it manageable. Furthermore, it is always challenging when one has to make a lot of payments every month. The chances of missing a payment are often high, something that can significantly damage your credit score. Nonetheless, when you only have one payment to make, you can hardly miss a payment. Besides, when you have only one payment to make every month, you feel you are in control of the debt, and this serves as a motivating factor for repayment. To learn more, reliable money lenders in singapore.
That is just an overview of what happens when you consolidate your debt. Let us now focus on the instances when it is an excellent idea to consolidate. To be successful in your consolidation approach, the following must hold:
- Your overall debt less mortgage is less than 40% of you gross earning.
- You have an excellent credit that can approve you for a 0% credit card debt consolidation loan at a low interest.
- You have cash flow which consistently provides for payments on your debt.
- You have a strategy that will stop you from getting into more debt.
Debt consolidation works if there is a solid plan that will protect from the snare of getting into more debts. It will be pointless to consolidate and still get into more debts. Again, ensure there is financial prudence before making this decision. Debt consolidation may not be a nice idea in some cases. It is not guaranteed that you are going to benefit from this arrangement. For instance, if you have poor spending habits that lead to more debt, consolidation cannot help you in any way. It may also not be of help in case you are overwhelmed with debt to the extent that you are not in a position to repay even if the payments are reduced. Moreover, if you have a small debt load that can be fully paid in a year, and you only save a minimal amount if you consolidate, avoid consolidating. Also, if your overall debt exceeds half of your earnings, consolidation may not be a nice option.
The Bottom Line
Debt consolidation is a nice strategy for dealing with loans. We have discussed several things that happen when making the decision to consolidate. We again wish to emphases size that you should only consolidate when you are certain of ending up with lower interest compared to the interests on your current loan.