Debt consolidation is one of the options one can turn to when unexpected negative event happen, which often results to financial problems. This is a way of catching up with all those bills when your normal income cannot manage to pay on time.
Debt consolidation loans enable an individual to pay existing debts and help them avoid being in the situation of bankruptcy. These finance offers quick small debt payments, while offering lower interest rate compared to individual debts. This thus results on lower debt payment per month.
So, what are the good thing with debt consolidation loans, and what are the risk the goes with it? If you are thing of acquiring one, it is better know this first so you know what to be expected with it.
Debt Consolidation Loan Benefits
One reason why more and more borrowers are being hooked up with Debt Consolidation Loans is the interest rate it offers. Unlike individual loans which often have high-interest rate, debt consolidation loans offer lower interest rate along with the monthly payment basis. Which means you are only required to pay the debt and bills once every month. This is because the company will divide the payment and disburse the money to your existing creditors.
Debt consolidation loans are often requested by individuals who need fund for immediate payment of their financial responsibility. Acquiring debt consolidation program will free you from all the worries regarding debt account default, penalty fees, increased interest combined through time and late charges. All of this, if not eliminated, will be reduced through the help of debt consolidation loans.
You will also get debt-free in a short period of time. Debt consolidation loan can enable you to be free of debt just within 4-6 years compared to the usual 20 year time.
Since the purpose of the loan is to help you pay your existing debts, aside from the fast payment, you will also get rid of all those collectors who often call for your attention and send letters because of your outstanding balance. But this will only be possible if the borrower knows how to pay on time. Late payments for the loan can still trigger those collection notification related to the loan.
Because the loan pays your existing loans on time, you are less likely to encounter late payments and defaults accounts. This will therefore cause a positive credit score impact. When your loan has completely paid off, the consolidation company will talk with your creditors and will try to have reported accounts be on your favor.
Debt Consolidation Loans Risks
Even though debt consolidation loans are easy ways on reducing debt through monthly payment, debt consolidation loans can also mean more financial trouble in the future. This usually happens after the completion of the original debt payment. Usually, the original accumulated debts will stay open. In cases where there are still available balances, the borrower often tend to spend the money more than the necessary and sometimes, start using this as a cover for financial shortage.
Debt Consolidation Loans can help you acquire zero credit loan balance. Well, this is pretty attractive to the borrower and uses it to buy anything s/he preferred. This is the greatest mistake that the consumer can have, because doing so can just undo all the benefits brought by debt consolidation loan. This can even make thing worse. If you show inability of controlling your debt, then the lender might not give you another chance to acquire another debt consolidation loan.
Another risky thing with the debt consolidation loan is the feature of its payment. The typical nature of debt consolidation loans is refinancing your balances, which often comes with higher interest rates. The debt consolidation loan will offer you lower interest rate which looks like the way of saving more money.
But in reality, the lower rate offered doesn’t necessarily allow you in saving money, but rather becomes more expensive. Usually, a borrower who prefers to have a fixed-rate, or a first mortgage will lengthen the term of payment. You might get swayed because you are required to pay only little amount of money per month. But since the covered term is much longer than usual, calculating the overall amount at the end will only become higher than you ever imagined.
Well, all these risks can still be avoided if you know how to follow simple steps and watch your debt. You must consider this loan only as a temporary financial solution to your financial condition. Make sure no to engage with long-term loans to avoid excessive amount of payment. If you acquire increased income, then consider using your extra income to refinance a shorter term loan.
Also, consider budgeting and controlling your expenditures. Change your financial lifestyle. That’s the key. Have the discipline and commitment required so you will keep track of your finances and live on great financial state.
Dec 25, 2015