If you have lots of small debts, it can prove hard to manage them all. How do you consolidate debt? Debt consolidation involves getting approval for a loan from a bank or person-to-person lender and using the cash to pay off all of your debts. Instead of making repayment to multiple creditors, you’ll pay the one. Your personal finances will be simpler so you’re vastly less likely to fail to make payment. This means no more late payment charges and a higher credit score. However, it’s important to close down some off your surplus credit cards so you aren’t tempted to use up all of the credit again. If you don’t do this, you’ll need to show excellent self control.
If you’ve been finding it hard to pay your bills, consolidating your debt helps to minimize the percentage of your monthly income that goes towards servicing your debt. You’re able to pay less interest and divide the repayments over a longer period of time. If you’ve taken out a HELOC loan, this could be as long as your mortgage. If you’ve taken out an unsecured loan from a peer-to-peer lender, the normal repayment term is 5 years. Getting a loan on an unsecured basis is optimal, but much harder to get in the current financial climate.
The main negative associated with spreading the repayments over a longer period of the time is that you’ll pay more interest. Although the lender is likely to encourage you to spread the loan over the maximum term, this isn’t necessarily right for you. Choose a term where you can afford the repayments, but don’t extend the length of the debt. You can change the repayment term if you find it tough to make payment. It’s important to check the T&C’s of the agreement to verify that you can pay back the money you owe early without paying an early redemption penalty.
If you have a poor credit rating, the only way that you’ll be able to consolidate debt is with a secured loan. This means that, if you default on the arrangement, your home can be repossessed. If you have poor credit, it’s worth looking into a consumer debt program. You’ll be able to become free from debt, but you won’t be risking your property. Given how many people have lost their property in the last few years, this is an important consideration. If you have a good credit rating, you may prefer to put all your debt under one roof so that cost of borrowing remains low in the future.
A home equity line of credit enables you to offset the interest against your tax bill. You won’t get that benefit on an unsecured loan or charge card debt. It’s not a reason for consolidating debt, but it’s a further benefit.
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