The increasing debt can be a hard challenge to repay especially when the debt is split into different credit cards, loans such as student loans, car loans, personal loans and others. In many situations, people do not realise the debt problem until they are completely overwhelmed and do not know where to start off.
Debt consolidation provides an option to give some relief from the financial stress.
It is a process of consolidating all the smaller debts and making them into one debt. It provides for a single monthly payment and can be co-joint with other lower interest rates.
By making all the smaller debts into one debt it will reduce and reorganise the bills. All the different bills which have different payment dates will get consolidated and one single payment can be made. The single payment will follow a lesser interest rate compared to the different bill payments. It will help you to pay the debt faster and less money towards the interest.
When is the right time to consolidate Debt?
When you are having high debt numbers and the interest rate payments are very high, it becomes a very difficult job for payment of the principal and interest across different debts. There are some easy ways to recognise when you can consolidate the debt and when you can move forward with debt consolidation.
- Struggling to pay the monthly deposits
- Losing more money on Interest payments
- Paying Multiple debts
- Increase in loans
1. Struggling to pay monthly deposits
If the problem of debt is increasing and you find yourself in a difficult situation for making the payments then it is time to consolidate your debt. Everybody has unique situations with different financial circumstances. When you choose debt consolidation the financial experts will suggest the best solution according to your requirements. They suggest in accordance to your requirements such as low monthly payments, reduced consolidated interest rate which will make you less worried about the monthly installments. With the lesser monthly payments you have, you can stabilize your financial situation.
2. Losing more money on Interest payments
When you are paying loans and making credit card payments you will be bearing the additional expense of interest payment. Different banks offer different interest rates and different timelines. Some loans may have higher interest and some have lower interest depending on the term of the loan. If you are also having credit card EMI payments then these interest rates will also be an add on to the total payments. Every month the borrower will be paying higher interest. This interest component will be earning income for the lender and the borrower will lose money by paying higher interest. When you are paying a large amount of money on the interest, then it is time for you to consider debt consolidation.
The interest amounts that you pay will not help you in reducing your principal loan amounts. The lesser interest you are paying the more amount you will contribute towards principal payment. It is best advised to track and check your loan repayment history.
Over a period of time the money you pay for the interest rate will eventually increase and the principal loan amount will not decrease which is not a good sign. Debt consolidation will lower interest rates and will help you to come out of debt faster.
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3. Paying Multiple Debts
When you have multiple debts such as student loans, personal loan, home loan, credit cards payments and loans from friends or family members. When you are paying multiple debts it is time to consolidate your debts. It is important to find out which loans can be consolidated and which debts cannot be consolidated. It is best to find out which financial institution provides the debt consolidation according to your financial situation. The lender will verify the individual’s financial capability, check the background and provide the facility of debt consolidation. If you have debt consolidation you will have more control over your payments. You will have to pay only one monthly payment instead of multiple payments.
4. Increase in loans
You may have an increase in the number of loans as per your financial responsibility in your life. Banks offer top up loans, additional loans and sometimes you may also get good offers from different banks providing best interest rates loans. You may have a need and they provide loans and this way the number of loans may increase over a period of time. When you are in such situations, you may choose to consolidate your debts with the lender.
Click here for New financial goals after clearing Debts
Credit Score and Debt consolidation
There are various factors that financial institutions will verify and determine whether to provide you with debt consolidation. Among all other factors lenders check the credit score and determine if you qualify for debt consolidation. Apart from the credit score factors such as good history of payments, lender and borrower relationship, credit worthiness, asset back up and good financial records also play a very important role in determining qualification for debt consolidation.
It is always important to check your credit score and you should have a good idea about the amounts you’re paying each month. Checking credit score will help you to know how much you are eligible for getting approval for debt consolidation.
Some lenders provide debt consolidation even for the borrower’s who have low credit scores. They consider other factors and the lender wants to be assured of the future payments. Credit scores are data of past events, financial institutions also consider future repayment capacity. If they are assured of repayment capacity then they provide a facility to the borrower. However, this is not an assurance it may depend on the lender’s discretion for approval.
Take away
Having a solid plan for overcoming the financial debt will help you to take advantage of debt consolidation. If you run behind further debts, again you will fall into the vicious cycle of repayments. Prepare a budget and strictly follow it for repayment of the debts. If you effectively manage your finances, then you can overcome the financial burden.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
