Guide On What Is Debt Consolidation and How It Works
Debt consolidation involves making a single payment to a third party agency. The third party agency will be responsible in sending out the payment to the different creditors you owe. Debt consolidation is for people who don’t want to deal with multiple bills payments every month. Grouping your loans can prevent you from getting penalty when you miss a payment.
Lower Interest Rates
The agency can make an arrangement with the financial institutions so that you enjoy lower interest rates. When the interest fee is lowered, more of the money you deposit will go towards paying the balance. For example, if you have 4 credit cards with interest rates of 10%, 14%, 16% and 17%, you can consolidate the accounts into a single loan with a much lower interest rate that range from 10% – 12%.
Debt Consolidation Loan Term
The plans are somewhat similar no matter which agency you choose to sign up. The agency will decide how much you need to repay every month in order to cover your entire debt to the creditors. The plan will be settled in 3 – 5 years if you always pay on time. Your monthly repayment is about 2.5% of the total debt you owed to the creditor. It is up to you to stop the plan. If you want to clear off your debt quickly, you have the option of paying more than the minimum monthly repayment amount. The monthly repayment amount is fixed. As soon as one account is paid off, other accounts will get a larger portion of the payment.
Is Debt Consolidation for You?
Debt consolidation services is a good option for you if you have enough money left over to pay after paying for all your expenses. Debt consolidation is suitable for people who owe unsecured debts such as credit cards, personal loans, student loans and etc. It is also ideal for people who have problems with getting collection calls from the debt collection agency. The debt collection agency will stop making calls as soon as you start the plan. You must make sure that you are able to pay back your debt in long term after the debt consolidation.
Close Your Credit Card Accounts
Many debt consolidation companies will require you to close all your credit card accounts until you have completely paid for all your debt. You will also not be allowed to take on new loans. This is to prevent you from wrecking more debt until you pay off all the current debt
In conclusion, consolidating your debt via a third party agency can train you to become disciplined in financial management. It can help you to make timely payment and rebuild your credit report.