A Guide to Debt Consolidation
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Debt consolidation involves combining multiple debts into a single loan, usually at a lower interest rate. You are required to make a single payment each month making it easier to manage your outstanding balances.
In this blog, we consider the many issues surrounding debt consolidation.
Should You Consider Debt Consolidation?
Debt consolidation is a good idea for those individuals who have multiple credit lines and large outstanding debts with each creditor. Multiple credit balances make it difficult to keep track of things and you are likely to miss a payment. The interest rates may also be higher for some lines of credit.
The Types of Loans That Are Eligible For Debt Consolidation
The following kinds of loans and credit accounts are good candidates for consolidation into a single account.
* Credit Card Balances
* Student Debt Loans
* Retail Store Cards
* Medical Bills
* Personal Loans
* Business Loans
* Supplier Credits
* Accounts Payable
* Accrued Service Charges
* Payday Loans
* Collection Accounts from Different Vendors
Benefits of Debt Consolidation
1. As you are unlikely to miss payments, it saves you from fines and late fees.
2. Consolidating multiple credit lines into a single loan usually improves your credit score.
3. You no longer get calls from collection agents.
4. Since you have a single payment you can schedule it around the time you get paid your salary to avoid missed payments.
5. Debt consolidation simplifies your payment process and saves you time that would be otherwise spent sorting through multiple bills.
6. Debt consolidation usually reduces your interest payment as the charge is often lower than credit card APR and other forms of loans.
Drawbacks of Debt Consolidation
1. In order to consolidate debts, you must have a minimum amount of total debt. For example, debt consolidation usually does not apply if your total outstanding loan amount is less than a £1,000, unless you are looking at an IVA online.
2. The payments are mandatory. Missing a payment on your consolidated debt account without prior notice can have severe consequence and you may be declared bankrupt.
3. If the original debt you are consolidating into a single account charges a lower interest rate, then you may end up paying more.
4. It takes time to set up a debt consolidation program and you would need to work with an expert credit counsellor to do it for you.
5. Some types of debt consolidation accounts can have an adverse effect on your credit score and lower it.
Options for Debt Consolidation
If you decide to go for debt consolidation, you have the following options.
1. Debt Management Plan (DMP): In this program, you work with a certified credit counsellor who reviews your entire debt, assets, income, and expenses to design a DMP for you. A formal version of this would be an IVA.
2. Debt Settlement: This involves working with your creditors to lower the total amount you have to repay. This option costs you lower but has a significant negative effect on your credit score.
3. Consolidation Loans: These include 0% balance transfers, personal loans, home - equity refinancing, and student loan consolidation.
An experienced credit counsellor can advise you whether debt consolidation is more suitable for you and which program to go for based on your situation.
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