If, like many people, you have managed to find yourself with more debt than you can handle, you might want to consider a debt consolidation loan. The idea of ‘another loan’ might sound like a terrible idea, but a debt consolidation loan does not add to your existing debt - it replaces it. The goal here is to make your debt more manageable by replacing several debts with a single larger loan.
Your lender pays off all of your outstanding debts - store accounts, credit cards, and loans - on your behalf, and lumps that debt into a single debt consolidation loan. In this new loan your repayments are typically extended over a longer period, which brings down the cost of your monthly instalments, making them more affordable. But there is a catch: a longer loan term also increases the amount of interest you pay over the life of the loan.
For this reason, you should always aim to pay off your debt in as short a time as possible. Once your collective debt has been absorbed into a consolidation loan, your loan accounts will be closed, but your credit accounts, such as store and credit card accounts, will stay open. If you've been struggling with your debit, you should really consider closing these.
If you aren’t impossibly deep in debt and still have a respectable credit score, then debt consolidation may just be the right thing for you. You’d benefit in two ways from this approach:
The main advantage of debt consolidation is that it helps you simplify your finances. By lumping everything into one loan, you avoid having to deal with multiple creditors on various accounts, each with their own fees. Instead you have just the one, which saves you time, admin fees and stress. It can also help you to lengthen your repayment term, which lowers your monthly instalments. This might be essential if you are battling to make your monthly repayments.
While a debt consolidation loan can reduce your monthly repayments, this comes at a cost. A longer long term means that you accrue more interest over the life of the loan, making your debt more costly. The message here is that while it might make sense to use a debt consolidation loan to create a little breathing space, you should still aim to pay off the loan as quickly as you can. Don’t for a second interpret any new ‘disposable’ income as increased spending power. You need to take that money and put it straight back into your loan, thereby limiting its cost to you.
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