Debt consolidation – is it the right choice for you?

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Debt consolidation – is it the right choice for you? Debt Consolidation VIEW BEST DEBT CONSOLIDATION

As the name suggests, debt consolidation allows you to combine all your owned money into one account. Though you can get debt consolidation loans through a bank, they are mostly offered by debt relief companies such as Accredited Debt Relief, CuraDebt, Debtmerica Relief, Freedom Debt Relief and New Era Debt Solutions.

There are two main ways to consolidate your debt:

  • With a loan

This involves taking out a loan big enough to pay all your debts. This will leave you with only one loan and you’ll deal with only one creditor. Debt consolidation loans can either be secured or unsecured. If it’s a secured loan, you have to guarantee the loan with an asset, such as your retirement account, home or life insurance policy. If your loan is unsecured, you will not need to tie any assets to the loan.

  • Through a debt consolidation program

The second option does not require you to take out a loan. Instead, a debt management agency negotiates with your creditors on your behalf. Once successful, they will pay your creditors and you will pay an agreed amount to the debt consolidation company each month. 

By Editorial Team | 1st February 2019
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Debt consolidation is right for you if:

  • What you owe is not more than 50% of your earnings.
  • You can qualify for a low interest consolidation loan or a 0% interest credit card.
  • You have a cash flow that can cover debt payments.
  • You have put measures in place to prevent you from going into debt again.

 

6 reasons why debt consolidation is a good choice

Before we go into reasons why consolidating debt is good, it’s worth mentioning that you should only trust the highest rated debt consolidation company with your financial matters. That said, below are some reasons why consolidating debt is a good choice.

1. Low interest rates

A low interest rate will save you a lot of money and reduce the amount of time you need to spend repaying your debt. When taking out your consolidation loan, double check to ensure that the interest rate is lower than that of your existing debt. 

Factors such as the size of the loan and your existing credit score will affect the interest rate on your loan. It’s also worth bearing in mind that unsecured loans have higher interest than secured loans.

Loving wife with son comforting upset man at home table
Debt consolidation can free you from financial misery (Picture: iStock by Getty)
2. Qualification requirements are less strict

You don’t need a great credit score to qualify for a secured consolidation loan. Since you have collateral in place, the creditor can repossess it should you default on your payments. Note however that your loan will be limited by collateral value.   

3. Better repayment requirements

Most debt consolidation loans take between 24 and 72 months to repay. If you simply pay the minimum it will take longer to clear your loan and cost more than if you opt for a debt consolidation loan or other debt relief options.

4. It’s easier to manage one debt account

If you have multiple credit cards, you might find it challenging to manage all of them. It’s also easier to default on payment when you have multiple accounts to follow up on. A debt consolidation loan simplifies things for you by ensuring you only have one loan to pay.

However, as mentioned above, the interest rate on the new loan should be lower than that of your current debt for the consolidation option to make sense.

5. You will improve your credit score

Maxed out credit cards contribute to a high utilization ratio. This means that if you have $10,000  worth of credit available and your debt is $9,000, your utilization rate is 90%. Such a high debt to credit ratio will affect your credit score. But if you pay off the debt, this will reflect better on your score.

Happy debt free woman in glasses holding a credit card cut in two pieces
Debt consolidation can improve your credit score (Picture: iStock by Getty)
6. You will receive free debt counselling

Debt counselling is offered as part of the package whenever you sign up for debt consolidation. A debt counsellor will help you to analyze your current financial situation. The counsellor will also help you decide if debt consolidation is the right choice for you. With the right advice, you can make an informed decision about the option that will give you debt freedom in a way that suits your income.

Conclusion

As discussed above, debt consolidation is a method of managing high interest debts by rolling them into one low interest loan. A lower interest rate will allow you to pay off your debt faster. Note however that even after you consolidate your existing debts, you need to change the spending habits that landed you in debt in the first place, or you will never completely rid yourself of debt.

Written by
Editorial Team
Our Editorial Team is constantly watching for new and exciting services to report on. They aim to bring balanced, honest reviews to the site to give you the best comparisons and ensure you have the knowledge to choose the product right for you. Read more.
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