If you have multiple debts and access to a single loan that can enable you to roll all debts into one single payment at a lower interest rate, you should consider that. Opting for debt consolidation is a great option as it streamlines your monthly payments, reduces the rate of interest per month, and may also help free some income for household consumption.
Table of Contents
How to consolidate debts
Reviewing various debt consolidation methods can help you identify the best option that is less risky and suits your debt consolidation goals. Some of the most effective debt consolidation methods are;
- Taking personal loans
Financial institutions, credit unions, and online lenders offer loans at affordable rates. Through reviews, you can compare various options and opt for the best. The terms and conditions of the loan, repayment period, and installments are factors to consider when choosing a debt consolidation loan.
- Home equity loans
Homeowners can take home equity loans or lines of credit to consolidate other small debts and rearrange their finances. But they should bear in mind the risks associated with home equity loans. Foreclosure, home value decline, and closing costs may affect your finances negatively. But with proper financial advice and planning, a home equity loan can help you consolidate debts.
- Claim part of your retirement benefits
The main disadvantage of this option is that you lower your retirement claims in the future. It also attracts penalties, but it may help free some income for investments. That way, you can replenish retirement benefits from the investment returns to cushion your finances.
- Apply for zero-interest balance transfer credit card
A high credit rating and budget to enable you to repay the debt before the zero interest period expires are a requirement. You should consider the promotional period, fees, other hidden charges that may apply, and annual fees on the card. Comparing various available options based on the above factors can help you get the best balance transfer credit card.
Benefits of debt consolidation loans
Financial experts recommend that you take a debt consolidation loan only when your cash flow is consistent to enable you to pay the installments. Reviewing your monthly income to ensure that the expenses do not exceed 50% is also necessary. Below are some of the benefits of taking a debt consolidation loan;
- Simplifies debt repayment process
After debt consolidation, you will only be making a single monthly installment. It relieves you of the pressure of making many installments every month. It may also lower your monthly installment and consequently increase your monthly income.
- Reduces credit utilization ratio
Reducing the credit utilization ratio increases your credit score. A high credit score is beneficial as it helps to enhance your credit limit in the future. With only one debt to pay, you are not likely to miss any loan repayment, and that also helps to improve your credit score.
- Reduces the debt repayment period and lowers the rate of interest
The debt consolidation process involves the household income, debts, and credit score to determine your loan repayment period. They ensure that you pay the loan in the shortest time possible to help reduce the overall interest. With a shorter debt repayment period, you also reduce the interest rate.
- Psychological benefits
Debts can be overwhelming and may lead to stress. Many health conditions result from psychological stress. Having peace of mind knowing that you have made your monthly loan installment can help relieve stress. You also do not get constant reminders from various creditors to repay the loans when you consolidate all the debts.
- Makes financial planning easier
Debt consolidation loans have a fixed repayment date. Unlike credit cards where customers can repay minimum and roll over the balance amount, a debt consolidation loan has a fixed repayment period and amount. A debtor can reduce the repayment period by making additional loan payments. To repay the debt within the specified period, a debtor should work towards loan repayment and can accomplish the goal to secure more financial freedom.
The debt consolidation approach you take will depend on your financial situation. It is advisable to use the debt consolidation calculator to help you make the right decision. Financial expert advice from a tax advisor, an attorney, or a financial consultant is advisable. After repaying loans, financial discipline is vital to avoid getting into more debts in the future. It is advisable to take loans for investments. If you take a loan for whatever reason, ensure that you repay the loan on time and make plans to become financially independent without depending on loans.