Debt can feel an awful lot like the deep end of a swimming pool before you’re a strong swimmer. You keep sinking, you flounder about but the more you work the less you seem to be doing.
Suffice to say, getting out of debt is a hard proposition. However, there are certain strategies that you can employ to your advantage if you’re in the process of repairing your financial health. One of these strategies includes debt consolidation.
In this article, we’ll answer the question of “how does debt consolidation work?” and more. We’ll introduce you to the pros and cons of debt consolidation so that you can decide whether or not using it is a good idea for your current financial situation.
How Does Debt Consolidation Work?
Debt consolidation is when you consolidate debts from multiple different creditors into one single sum. Then, you take out a personal loan in order to pay down all of these debts immediately.
The interest rate on the personal loan should hopefully be significantly lesser than the interest rates on all the other debts that you have endured.
Note how this is different from debt settlement. With debt settlement, you negotiate with each individual creditor to reduce the amount that you are owed so that you are able to pay the debt off.
While you can combine both debt settlement and debt consolidation (by first negotiating with your creditors then combining your reduced debts into one personal loan), the two things are different strategies and can be used independently.
The leading reason why you should opt for debt consolidation is that you just have to keep track of one payment. Instead of having multiple creditors, you satisfy all of those creditors at once and now just have one institution or person that you are paying.
In addition, the personal loan that you take out can be a secured one. A secured loan is one that holds collateral against your loan, so if you fail to repay, the collateral can be taken away.
If you do opt for this kind of loan, then your interest rates will typically be far less than what you have been paying your creditors. Your interest payments may even be tax-deductible, contributing to your financial health.
The cons of debt consolidation are also noteworthy. Firstly, it may be hard to get a debt consolidation loan if you can’t put anything up as collateral. Read this blog for more info.
Second, debt consolidation can make you feel as if you are in a better financial spot than before. This leads to you getting complacent and not paying down your loan as aggressively as you should.
This can turn into a vicious cycle where your debt consolidation strategy only ends up hurting you as late payment fees and interest stack.
Debt Consolidation: Is It Right for You?
Now that you know how does debt consolidation work and its advantages and disadvantages, you should be far better equipped to decide whether or not to employ this strategy with your financial situation.
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