Debt
consolidation is the combining of a number of loans into one single loan and it
is similar in many ways to re-financing, in that you use one new loan to repay
your existing loans.
When you
consolidate, you are not clearing the old debt, but you are moving your old
balances for many loans into one larger loan. The total value of what you owe
will still be the same as it was prior to the consolidation, but you may gain
certain benefits from combining your loans and moving them to another lender.
As an
example, let’s assume that you have outstanding balances on two credit cards.
You owe $1,500 on each of those cards and the interest rate on both cards is
18% APR. If you wanted to consolidate debt, you could obtain a single loan of
$3,000, ideally at a much lower interest rate, and repay the credit card
balances with the funds from the loan.
Why
Should You Consolidate Debt?
Simply
moving money from one place to another doesn’t achieve anything, but there are
ways that you can consolidate debt that will be beneficial for you. When you
find the best way of doing it, that’s when you’ll really reap rewards and gain
an upper hand in handling your finances. There’s plenty of places you can check
to learn the best ways of doing it. But one of the top spots is AllstateDebtConsolidation.
They give
you the full low-down on what needs to be done and how to do it in a way that
best meets your needs.
To
Save You Money
The main
reason why you may want to go with consolidation is that it could save you
money if you can borrow at a lower interest rate than you are currently paying.
That would be a big boost to your ability to make the necessary payments every
month.
Credit card
balances, for example, usually attract high interest rates, which can sometimes
make them difficult to pay off.
If you can
consolidate your credit cards into one loan that has lower interest rates, you
will make a saving on the amount of interest that you are paying. That will
mean that a higher proportion of every dollar that you pay toward your bills
will go towards reducing the principal amount. Ultimately, that will help you
pay it off faster.
To
Simplify Repayments
Consolidating
debt will also make repayments simpler to manage, because there will only be
one payment to make. While switching to one payment won’t save you money, it
will make it easier to make sure that you don’t miss any payments and it will
help you avoid late fees and penalties.
In some
cases, you might find the single payment is larger than the total of the
smaller payments that you used to make, but that can be a good thing. If the
interest rate is lower than what you were paying, a larger monthly repayment
will mean that you are paying off your creditors a lot faster. Simply making
the minimum repayment on credit cards will hardly make even a small difference
to your totals.
That’s why
it’s crucial to make as large a payment as possible each and every month. It’s
also important to scrap together as much money as you can and put that towards
what you owe.
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