Unmanaged debt can take a toll on your financial well-being. Debt consolidation is a way to defuse your debt cloud. Check out these five debt consolidation methods that can pull you out of your debt tunnel.
How do debt consolidation loans work?
Debt consolidation enables you to combine your multiple debt obligations into a single loan. This method helps you sort and tidy up your finances to make money management more efficient. Once you take out a debt consolidation loan, you will only have to pay towards the new loan.
A popular way to consolidate your debts is through debt consolidation loans. A debt consolidation loan is fundamentally a personal loan used to consolidate debts. High-interest debts such as credit card debts or overdrafts accrue more and more interest over time. A debt consolidation loan helps you pay off these debts and save on interest.
Here’s when you should consider a personal loan for debt consolidation:
- You will be able to afford payments for the new loan.
- You’re getting a new loan at a lower interest rate.
- The new loan has doesn’t unnecessarily increase your loan term/repayment period.
Advantages of using debt consolidation loans (UK)
- Faster debt settlement: Debt consolidation loans have fixed monthly instalments over a predetermined period. Knowing your repayment schedule and monthly payment amount allows you to track your repayments, motivating you to pay off your loan sooner. The sooner you pay off a loan, the lesser you end up paying as interest.
- Organized finances: You may lose track of the outstanding balance, repayment date, interest and penalties with multiple loans. With a debt consolidation loan, you can easily organize numerous debts into a single, more manageable loan. This way, you’ll know what to pay at the time of repayment.
- Lower interest rates: If you’ve consistently paid towards your debts, you may have notices improvements in your credit rating. With an improved score, you will likely find loans with lower interest rates than all of your outstanding debts combined.
- Improved credit score: Debt consolidation loans may help improve your credit score over time. Timely payments account for about 35% of your credit score. Thus, on-time payments can give your credit score a boost. Plus, using a loan to consolidate high-interest credit card debt may help you lower your credit utilization ratio.
Our low-interest debt consolidation loans ideal for me?
Debt consolidation loans are ideal for those with a decent credit score. A good credit score will help you qualify for offers with lower interest rates, reducing the effective cost that the loan incurs you. Therefore, a shorter term and lower interest rate on debt consolidation loans can help you save money on interest.
It is also important to review all your loan agreements before applying for a debt consolidation loan. Some lenders impose a charge on early repayments. If you’re nearing the end of your term and your lender charges a hefty early settlement fee, you may want to reconsider consolidating the loan.
5 low interest consolidation loans to defuse your debt
- Balance transfer cards: A balance transfer card has an initial promotional period of 12 to 21 months, wherein you can avail of a 0% interest rate. However, as soon as this promotional period expires, you’ll have to pay standard interest on the remaining balance. Furthermore, a lot of card providers charge 2-5% of the total amount you transfer. You will need a high credit rating to qualify for a balance transfer card.
- HELOC or Home equity loan: HELOC and home equity loans allow you to leverage the equity in your property to secure a loan. Home Equity Line of Credit or HELOC is a revolving credit wherein lenders set a borrowing limit based on your equity share. You can use these funds at your discretion. You’ll only accrue interest on the money that you use. On the other hand, home equity loans allow you to borrow money against your equity in the property, payable through fixed monthly instalments. Both these forms of credit are ideal for sizeable loan amounts, usually used to consolidate high-interest debt. However, there are risks associated with a HELOC or home equity loan. If you default, you might end up losing your home. Plus, you must have at least a certain percentage of equity in the property – the more, the better. Both HELOC and home equity loans have longer repayment terms and lower interest rates.
- Cash-out refinancing: Cash-out refinancing is similar to how remortgaging works. You essentially replace your existing mortgage with a new one and borrow an amount larger than your current outstanding balance. The difference is used to consolidate debts. Cash-out refinancing requires you to have adequate equity in the property.
- Debt Settlement: Debt settlement involves negotiation with your lender to settle the loan for an amount lower than what you owe. This will be considered as the final settlement of your debt with this lender. You can either negotiate with the lender yourself or involve a debt settlement firm to negotiate on your behalf. However, third-party negotiators will charge you for their work. But beware, because this kind of settlement can leave long term imprints on your credit report, severely damaging your credit score.
- Bankruptcy: You can go to a federal court to file for bankruptcy to get your debts discharged. Bankruptcy also allows you to reorganize your debts, buying you more time to pay them off. Bankruptcy can get you out of most debts, but it’s not useful for tax debts. However, this debt consolidation regime can gravely harm your credit score. It could take years for your score to recover from the dip, so weigh the pros and cons to make an informed decision.
If used responsibly, debt consolidation is a smarter choice when dealing with multiple debts. Assess your affordability before applying for a consolidation loan. Remember, you will only be able to reap the benefits of a debt consolidation loan if you make timely repayments. Failing to cope with the payments can gravely impact your credit score.