Debt Consolidation: Is It a Sensible Idea?
When you have several debts to pay each month, it can be difficult to keep track of where you stand financially. Plus, when you’re juggling multiple payments, it’s easy to fall behind and rack up even more debt. If this sounds like your situation, you may want to consider debt consolidation. But is this approach right for you? Here’s a closer look at what debt consolidation entails and whether or not it’s a sensible idea for your money management strategy.
Rolling all of your existing debts into one is what debt consolidation entails. This might be a helpful approach to cut costs and interest, but it may not always be the wisest course of action.
What is debt consolidation, and how does it work? Debt consolidation is the act of combining your existing debts (such as credit cards and personal loans) into one debt by using a debt consolidation loan or increasing your home loan to pay off current obligations.
When should you consider taking out debt consolidation? Is it ever a good idea to have your debts consolidated? If you can obtain a lower interest rate and fees on the combined loan than on your existing debts, then debt consolidation may be beneficial. This might allow you save money and get rid of your obligations faster by looking at total costs instead
Debt consolidation can help you manage your finances by allowing you to make one monthly payment, rather than many. If you can get lower payments on the new loan, it will be easier to handle your money in the short term. Unlike credit cards, debt consolidation loans must be repaid within a set period of time. This may be beneficial since it allows you to plan when and how you’ll pay off your debts (provided you make your payments on time).
Consider the total cost of combining your debts. It’s critical to ensure that the new consolidation loan is less expensive than your existing obligations. Consider both the interest rate and fees on the new loan, as well as the cost of ending your old loans.
You’ll also have to pay processing and termination costs for the new consolidated loan and fees to terminate your prior loans. If you repay a fixed-rate loan early, you will generally be fined. It’s also important to consider how long the new loan will exist for; if it ends up being more expensive than your existing obligations over time, even if the interest rate is lower.
Be wary of converting unsecured debt into secured debt. You may be able to obtain a lower interest rate by combining unsecured debts (such as credit cards and personal loans) into secured debts (such as home loans). However, this is a hazardous practice. “Some individuals believe that the current home loan rates are an excellent incentive to consolidate fairly expensive unsecured debt into their home loan,” said Mr Benton.
A mortgage is also a long-term obligation, and if you don’t increase your payments to pay off the consolidated amount, it may be costly. You’ll defer the consolidated total to the end of the loan and will be paying interest on it for years if you leave your repayments unchanged. If you’re having trouble making your payments, debt consolidation isn’t a smart idea.
Also, keep an eye out for ‘debt agreement’ debt consolidation solutions, which are commonly known as Part IX (9) debt agreements under the Bankruptcy Act. These are legal bankruptcies that will show on your credit record for five years.
If you apply for a loan or credit card while still being unemployed, this will also be recorded on your credit report if you secure any type of credit. If you submit many applications for credit in a short period of time, it may have an adverse impact on your credit score and access to future lines of credit.
Contact a financial counselor before you decide to consolidate your debts. It is completely free to talk with a financial counselor who is not connected to any organization or business.
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