How debt consolidation works — simple explanation
combining multiple debt into one to improve manageability.
Keeping track of multiple debt is perhaps one of the most challenging task for most debtors. Often times we take out loans to help improve our living standards. Before long however, we end up with multiple debts that reach an untenable capacity making it difficult and sometimes virtually impossible to steadily pay back. In such a scenario debt consolidation becomes the go to alternative.
What is debt consolidation?
Debt consolidation is simply combining multiple debts into a larger one that is more manageable. Instead of tracking and making different monthly payments to various lenders, with debt consolidation, you make a single payment each month to a specified account or single line of credit.
How debt consolidation works
- Contact a consolidation company and inquire on the specifics of their programs. Make sure to do a lot of research before committing to a particular company.
- Request a quote and prioritize meeting with a financial adviser who will then analyze your situation. Keep in mind that all situations are different and would require tailored approaches and solutions.
- Identify the loans you want consolidated. Not all debts are similar given that interest rates differ.
Choose high interest loans first and leave out low interest rate loans that you can manage. The reason for that is to avoid paying more interest than you should. - Usually if you have a large amount of readily available cash and once you have narrowed down on the specifics, the consolidation company enters into negotiations with all lenders on your behalf.
Sometimes they wait until you pool a certain amount of money in order to start negotiating. - Once the consolidation company reaches an agreement with your lenders, you can go ahead and start settling your debts.
You’ll be required to make a single affordable payment each month for a period usually longer than you would with your regular loan.
Benefits of loan consolidation
There are various advantages to debt consolidation if you strictly adhere to the rules of engagement and make payments as required.
- Lowers your monthly payment to an affordable rate:
In most cases in order to offset your debt the amount you pay is set considerably high. However, debt consolidation significantly reduces that amount so that you can meet end needs while paying off your loan. You also end up paying less interest rates. - Merges multiple outstanding debt into one single loan head:
The headache that comes with tracking various numbers of loans you have to pay each month is unbearable. With debt consolidation all the stress is taken away since you only focus on a single loan. - Allows you to make a single payment each month:
Instead of making multiple payments to different lenders which by itself could be costly considering bank fees, you conveniently make a single payment which is then disbursed to the different lenders. - Helps avoid missing payments and incurring late fees:
Since you will only be focusing on a single loan as opposed to multiple ones, loan consolidation reduces the chances of missing payments and deadlines therefore giving you better control and management of your debt.
Disadvantages of loan consolidation
Much like any other financial tool or program there are certain disadvantages that are associated with loan consolidation. Here are the two main ones:
- Extends the loan repayment period.
- You might end up paying more.
Conclusion
It’s always advisable to track your debt and make sure that you only borrow what you can handle. Debt consolidation should be a last resort and always consult a financial adviser before fully jumping in. Like with all other loans, a consolidated loan ought to be taken seriously and you as the borrower have to ensure that you make all payments on time.
