Before 2008, debt consolidation was only available to a few consumers but, currently, it is the debt relief solution for most companies and individual stuck in the murky waters of debt resulting from a stagnant economy.
Whether debt consolidation is your best approach or not depends entirely on your current financial position. Here are the five reasons for consolidating debt as recommended by Toronto CPA and personal finance managers:
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- You get to pay less interest on your debt
By the time you are applying for a debt consolidation loan, you are deep in debt, and there is a high likelihood of the debt being the high-interest loans. This is often the case with unsecured loans like credit card debts.
If you take a debt consolidation loan, your interest on all your debts will be significantly lower. With lower interests, you have a better chance to pay off the debt plus interest monthly as opposed to interests only when you have high-interest debts.
- An opportunity to pay off credit balances
With this personal loan, in the form of a debt consolidation loan, you get to save on interests and improve your credit score ratings. You can also change your debt from revolving to installment debt.
While revolving debt lacks a pre-defined number of payments, installment debt forces you to repay the debt regularly, and you have a start and an end point as in a student loan.
Regular and on-time payments for debt improve your credit rating because it tells creditors that you are responsible and you can pay off long-term debts.
- It lowers your monthly payment
Debt consolidation provides a flexible repayment system offered by lenders allows you to customize the amount and the interest rate you want to meet your financial goals. If you are looking for a solution to lower your monthly payments, you should agree to a longer repayment term. Just ensure that the interest rate is fixed.
Lowered monthly repayment rates allow you to save or increase your remittance towards mortgage or 401k.
- It cuts down on your regular spending
The main reason why personal finance managers recommend consolidation is because it is one of the most effective budgeting solutions. Instead of making minimum payments on a debt for years, consolidation helps you determine the most reasonable amount you can pay monthly, after considering your expenses. When you pay off more of the debt monthly, you will be debt free faster, and you will also make significant savings.
You will also have one loan to pay off monthly rather than multiple loans with different rates and repayment periods.
So, if you find yourself in a situation where your budget is stretched because of the multiple high-interest debts, you may want to get this loan. It is also ideal when you cannot afford your current loan load.
- You’ll avoid charges and fees from creditor
Most credit instruments involve regular administrative and maintenance fees. These cost you more and increase the overall cost of the loan.
Transferring credit to a debt consolidation plan means you no longer have to deal with the fees and charges. This saves you money in the long run.
Even though debt consolidation presents a solution to debt management, the best solution remains to get hold of your finances and changing your spending habits.