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Everything You Should Know About Debt Consolidation

By on October 8, 2020 0 354 Views

You’re knee-deep in debt and are having trouble making payments and keeping track of whom to pay and when – this is no doubt an overwhelming situation, but it doesn’t have to be that way. Debt consolidation can help you repay all your current debts (or, at least the high-interest ones) with a new loan that has a lower rate of interest. 

But, how exactly does this help? Getting a new loan with a low rate will help you save a significant amount of money on interest charges. So, for instance, if you are paying an interest between 15% and 20% on your credit card debts, replacing these debts with a new loan that has a lower interest rate, for example, 10%, can help you save a lot over time. 

Apart from this, it’s safe to assume that you aren’t enjoying making multiple payments every month. Instead, if you replace all your debt payments with a single payment, imagine how much easier it would be to keep track of your payments. That said, debt consolidation need not always work. Here’s what you need to know about debt consolidation before you consider this option. 

There’s No Guarantee that Your Rate of Interest Will Be Lower

You’ll only be able to secure a lower rate of interest for the new loan if you have a favorable credit score. But, even if you qualify for a loan with a low rate of interest, there’s really no guarantee that your interest rate will continue to remain low. 

Low Rates Can Change

This especially applies to consolidating your debts with a balance transfer card. While you’re likely to have a low or no interest rate during the introductory period, most credit card companies will go back to their regular rates once this period is over. 

Debt Consolidation Does Not Mean You’ve Eliminated Your Debt

Consolidating your debts by taking a new loan does not mean your debts don’t exist anymore. So, if you’ve consolidated your credit card debts by getting a personal loan, you should not start using your credit cards again. Doing this will lead you to even more debt. 

Your Behavior with Finances May Not Have Changed

Just getting a new loan does not change your spending habits. You’ll need to exercise restraint with your spending and make it a priority to make payments on time for debt consolidation to work. 

While the solution is certainly not a quick fix, it can help you immensely if you make a plan to get out of debt and stick to it.

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