Most people have multiple debts of one kind or another. The loan can be in the form of a auto, student or mortgage loans, credit card debt, payday loan and others. These loans are taken out by responsible people to pay for essential expenses that a parson can’t afford to pay on one’s own. However, having multiple loans greatly increases the debt burden and if not managed properly or if an unexpected financial crisis materialized, the debtor can fall into a situation where they owe more money than than can afford to pay each month.
Apart from interest rates, loans entail different fees and charges that when added up can turn into a large sum. Individuals that have multiple loans and are facing difficulty in making installment payments can ease their debt burden by consolidating the loans into one single loan. This action in financial terminology is known as debt consolidation.
Here, we will talk about the benefits of consolidating the debts, as well as associated risks that can increase the debt burden.
How Can Debt Consolidation Help Provide Debt Relief?
Debt consolidation involves consolidating multiple loans into a single loan with one monthly payment. There are different benefits of consolidating the loans. For one, it is easier to manage a single loan as compared to multiple loans. By consolidating the loan, you will have to pay just one monthly installment payment. This provides convenience in making the installments and reduces the chance of missed payments that could reflect badly on the credit score.
Another benefit of consolidating the debt is that it can result in lower installment payment. This is usually the case if your credit score has improved since the last time you took the debt. It can also happen if the Fed rates have decreased lately, making the lenders willing to advance loan on a lower rate of interest.
Are There Any Risks Involved in Consolidating Debts?
Debt consolidation, in the majority of the cases lessens the burden of making debt payments. That being said, it is not the perfect solution in certain situations. Consolidating multiple unsecured loans into one secured loan is risky, as it can put your property at risk in the event of nonpayment of the loan amount. Moreover, the lender may allow unsecured debt consolidation. But you may end up paying a higher interest rate on the loans.
Even if you are able to reduce your multiple installment payments, you may end up paying greater interest amount due to extension in the loan payment period. Consolidating the loans in such a case may provide short term debt relief but at the expense of long term wealth.
In addition, there is a time risk involved with consolidating the debt as well. This is especially the case of most of your existing debt were obtained when you had good credit score. Any attempt to consolidate the debt when the credit score has decreased will result in an increased interest rate on loan. This will result in payment of an extra amount that you will be obligated to pay on the loan.
Learn three debt consolidation techniques you can use!