If you have a stack of credit cards and personal loans, debt consolidation could be the right step towards getting your finances under control. This option allows you to combine all your debts into one single and affordable monthly payment. The purpose of a debt consolidation loan is to pays off the outstanding balances of the various personal loans and credit cards accounts immediately. By doing so, you save money on interests, fees and charges applied against these debts.
- Managing one loan is easier than trying to handle several loan accounts.
- You are less likely to fall back into arrears or incur late penalty fees.
- Monthly payments tend to be lower than the cumulative amount of the original debts.
- There is less chance of you missing a payment, causing further damage to your credit rating.
- Making one payment, on time, will contribute towards repairing your credit history.
- Interest rates on these types of loans are more likely to be lower than that of credit cards.
- Decreasing your interest payments means overall reduction in the total cost of the debts.
The disadvantage of taking out a consolidation loan is that you might still have to pay penalties for defaulting on the original loans. Further, if your credit rating is already poor, you might find it difficult to secure a suitable loan at a reasonable rate. It also requires commitment to changing unhealthy financial management on your part. Failure to do so will risk you losing control and ending up in debt again.
In order to apply, you need to be over the age of 18 with a reasonable credit rating. To qualify for the best interest rates, you need excellent credit history. You also need to demonstrate a low debt-to-income ratio. If your credit history is poor, expect to pay a higher interest rate.