Taking out a debt consolidation loan is often an effective method of re-financing your debt. It involves taking out one bigger loan to settle all your others, and is typically a financial solution that has been designed to simplify multiple debt repayments and even save you money in some instances. The process, overall, involves taking out a single new loan at the lowest interest rate possible, to pay off all your smaller debts.
What’s the Point?
Debt consolidation loans aim to help you consolidate all your debt with the idea of freeing up your cash flow and having better control over your debts. There are a few instances when it is a good idea to consider this type of loan:
- If the new loan installment is lower than all your current debts added up. If the loan doesn’t actually free up some cash flow for you, there is not much point in taking it on.
- If the loan is an unsecured loan, such as your house isn’t going to be attached should you fail to make your repayments.
- If you use the money to settle all your outstanding debts and it is not going to be in addition to the current debt you have.
If you associate with the above three points, then a consolidation loan can save you money each month on administration charges, service fees, insurance costs, and even debit order charges.
How To Tell If You Need A Debt Consolidation Loan
Some indicators that this type of loan is a good idea for you include:
- You cannot keep track of monthly debt installments
- You aren’t sure which credit providers you’re actually paying each month
- Most of your income goes towards paying debts
- You’re taking out more and more loans to try and settle your debts
How Does It Work?
A debt consolidation loan is offered by lending institutions for the purpose of paying off your other smaller debts. The loan consolidates all your high interest credit card accounts into a single, lower interest loan and accrues less interest every month, which means you pay less over the life of your loan.
Contrary to credit card account, these loans are not normally attached to annual fees. So, depending on how many credit cards you have, you could save a great deal each year if you close your paid accounts. Paying a single loan every month is also simpler and a lot more manageable than trying to juggle a number of credit card accounts with differing due dates.
What’s more, if you are able to pay the full amount due on all your credit card accounts into your new debt consolidation loan, you will be able to pay off your debt a whole lot faster. Also, you will show “paid in full” accounts on your credit report which means you can increase your credit score significantly.
Finally, with lower monthly payments, you can make timely payments and more consistently than you could with multiple credit card debts which also looks good on your credit report and can work to increase your credit score.