Debt consolidation is a popular and helpful loan that allows you to get ahead of your debt and pay it off in order to ultimately be able to live debt-free.
Despite the popularity of this type of loan, many people are still not sure what exactly it is. If you take a look at the definition of “consolidation” you will already be able to get an idea of the meaning of the term debt consolidation.
A single debt repayment
Consolidation is the act of combining a multitude of things into one single more manageable “thing”. Thus if you look at its meaning in terms of debt, it will be the combination of debts into one more manageable debt account.
So in other words debt consolidation is taking all your debt (credit card debt, debt from outstanding loans, store account debt, etc.) and applying for a loan that will cover all that debt. Then you only need to repay the one single loan that comprises all that debt.
You might be wondering what the point of this is. You will still have to repay your debt, so aren’t you just moving it around?
Well, yes and no. You are technically moving all your debt to one single account, but it is not that simple. There are many benefits to debt consolidation that will make it clear why this is such an effective practice.
Pay less interest
First of all, it will affect the amount of interest you will be paying. As you know, you were previously paying interest on every form of debt, however, after being approved for a debt consolidation loan you will only be paying interest on one loan. Often the interest charged on a debt consolidation loan is lower than that charged on, for example, store cards.
It is recommended that when consolidating debt, high-risk interest accounts should be consolidated to ensure that you do save on some interest.
However, bear in mind that debt consolidation lenders also charge a fixed interest rate.
Consolidate debt for more affordable monthly repayments
Not only should you be saving on interest but your consolidation monthly repayment will be less than the combination of all your individual debt repayments. It is often possible to see a saving when adding up all of the monthly admin charges for each small debt that you will be saving on.
If you consolidate your debt, your larger disposable income will allow you to spend money on things you need, to invest or save up. After all, if you save up enough you might be able to pay off your loan much sooner than you initially thought.
Simplify repaying debt
Too many debt payments to make could result in one debt account being overlooked. Since debt consolidation involves only having to repay one single account, you will no longer have to worry about this happening.
It does not only minimise your risk of falling behind on payments but it also minimises your risk of a low credit score by possibly forgetting to pay one of your many payments each month.
