Every month a big portion of your paycheck goes into paying interest fees on your debts, which can put a lot of financial pressure on you. You can avoid these interest fees and save some money to put into your savings account. Debt consolidation helps you roll up all your debts into one so you can avoid multiple interest fees every month. If you aren’t familiar with how debt consolidation works, here is everything you need to know about it:
- What are the types of debt consolidation?
Consolidation loans have two basic types: secured and unsecured loans. To get a secured loan you have to put up one of your assets as collateral. On the other hand, an unsecured loan doesn’t require you to offer any of your assets as collateral but they are much more difficult to get and come with much higher interest rates. However, the interest rates on both types are still much lower than the rates charged on credit cards.
- How do you consolidate your debt?
There are two ways to consolidate your debt, you can either go for an interest-free, balance-transfer credit card, or a fixed-rate debt consolidation loan. In the first method, you transfer all your debts onto that credit card and pay the debt in full during the promotional period. However, you are going to need an exceptionally good credit score to qualify for that. In the second method, you pay off all your debts using the loan and pay back that loan in installments within an agreed-upon time frame.
- When to avoid debt consolidation?
What you need to understand is that a consolidation loan is not a magic wand that will wipe all your debt clean. It won’t be of much help if you can’t control your spending habits. Plus if you have no hope of paying off your debt even with smaller payments debt consolidation won’t be able to help you. Moreover, if you don’t have a massive debt load and you can easily pay it off within a year at your current pace, there is no need for debt consolidation.
- When is debt consolidation a good idea?
Debt consolidation is a good idea only when you have a good enough credit score to qualify for a 0% interest credit card or consolidation loan with low interest. Moreover, your monthly payments shouldn’t be exceeding half of your total gross income and you should have enough money to make regular debt payments every month.
- Is debt consolidation better than IVA?
You need to know all the details about debt consolidation and IVA to determine which one is better. Where IVA allows you to pay part of your debt to clear them, with debt consolidation you will end up paying more than you owe. Moreover, with an IVA, your creditor can’t ask for payments from you by law. Both debt consolidation and IVA have their pros and cons, now the decision is up to you.
Debt consolidation is undoubtedly one of the best ways to get some relief when multiple interest fees are putting extra pressure on you every month. After reading this article you know everything about debt consolidation and can now seriously consider the possibility for yourself.