21 Nov Debt Consolidation: How does it work?
Debt Consolidation: How does it work?
Most people are familiar with debt, and most people often have multiple debts that may include credit card debt, auto loans, and student loans, among others. If you have multiple debts, you may be striving hard and doing your best to make prompt payments and to honor all the installments. However, at times, paying multiple debts can be overwhelming. You will feel like you are channeling money to multiple bills, yet the bills have different payment dates. Credit card debts often have high interests, and no matter how hard you are trying, you may only be able to make the minimum payments that cater to the interest alone. You may hardly pay the principal amount, and the loan is likely to last for a long time. The good news is that with debt consolidation services in Toronto, your life does not have to be this hard.
In order to benefit from a debt consolidation program, you have to understand how debt consolidation works.
How do you consolidate?
There are several ways of consolidating debt. You may consolidate your debt using a debt consolidation loan. This entails taking a loan and using its proceeds to pay off all your outstanding loans. Instead of paying different installments to different lenders, you will only be paying one installment to one lender.
You may also consolidate your loans with credit. For instance, you may take a credit card debt and use it to pay another credit card debt. However, this is a risky affair, and it is not advisable because it mounts on you the extra burden of debt.
You may also consolidate your debts with home equity. This strategy entails using the equity you have built in your home. You can obtain a refinancing based on the equity and use the money to pay your credit card debt.
Important consolidation facts
You should understand several factors before you get started with debt consolidation. This will help you to understand what you should expect after consolidating your debts.
You need good credit: To to consolidate your loans, you have to qualify, and one of the qualifying factors is having a good credit history. You must also have a steady monthly income to be able to meet the monthly installments for the consolidated loan.
You may incur some costs: To ensure that you will benefit from a loan consolidation, you have to know that you will incur some consolidation costs. The costs may include loan origination fees, closing costs, and refinancing fees, among others. Consider all the costs involved to help you determine whether refinancing is a good option.
The consolidation loan may have a longer repayment period: After acquiring a debt consolidation loan, the loan may take a longer period to repay. For instance, you may choose to spread the loan into several years to enable you to pay lower monthly installments.
You are better off with unsecured debt: While acquiring a debt consolidation loan, it is advisable to go for a non-secured loan instead of a secured loan. You should be careful with secured loans. Usually, credit card debts have no collateral and are not attached to any of your assets. If you consolidate using a secured loan, the lending institution can take your property if you can’t pay the loan back.
After understanding how debt consolidation works, you can easily make a consolidation decision.