Are you struggling hard to manage your finances? Are you not being able to handle multiple debts? Debt consolidation could be the right option for you. Debt consolidation is a program that allows you to consolidate all the debts into a single monthly payment. It reduces your monthly payments, and in turn helps you save money. However, before you consider the option, you must know all its facts and attributes to determine whether or not it is the right option for your unique financial situation.
How does a debt consolidation program work?
When you enroll in a debt consolidation program, credit counselors negotiate with your creditors and reduce the interest rate on each of your debt. Then they collect a fixed monthly payment from you and disburse it to the creditors in order to pay down your debt. Some creditors even negotiate with creditors to waive off the late fees and other penalty charges so that it becomes more convenient for you to pay off the debt.
Advantages of debt consolidation:
* One of the primary advantages of debt consolidation is that it reduces interest rate. When you enroll in a debt consolidation program, credit counselors negotiate with creditors to reduce the interest rate. For instance, you owe $50000 on three credit cards with three different interest rates, 18%, 12% and 9%, the average interest rate you have been paying is 13%. Now after consolidation, if the interest rates come down to 13%, 10% and 7%, then the average interest rate becomes 10%. With this, you can save $150 each month on the interest rate.
* Another important advantage of debt consolidation is that it turns your multiple debts into a single monthly payment. This means you can make one monthly payment towards all your bills and debts instead of making several debts to several creditors. Handling a fixed payment each month is simpler than handling multiple debts with changing rates of interest.
* Debt consolidation makes your repayment term longer, which in turn lowers your monthly payments. Additionally, this saves a considerable amount each month.
Disadvantages of debt consolidation:
Although debt consolidation offers you a wide range of advantages, it is important to be aware of disadvantages as well that may occur.
* It’s true that debt consolidation makes a repayment period longer that lowers the monthly payments, but this has an adverse effect as well. This often leads you to making more payments towards the debt than you should have paid on your original debts.
* Debt consolidation can affect your credit score negatively, though usually not for a long period of time. When you enroll in a consolidation program, the consolidation company collects monthly payments from you which they sometimes do not pay to the creditors in time. Thus, the creditors report to the bureaus as “payment not yet paid.” This hurts your credit score till the time creditors get paid.
* After consolidation, you might get tempted to see the credit limit back on your credit cards. But if you continue to use your credit cards carelessly, you may fall further into debt.
Hence, it is to be concluded by saying that before you plan to pursue debt consolidation, educate yourself by knowing all its essential facts and attributes.