Debt Consolidation – Complete Guide

There is nothing complex about debt consolidation. It involves transferring outstanding balances on loans and credit cards into a single account. This is done not only for convenience, but for saving money and making repayment more affordable as well. The best results are achieved when the new account has lower interest rate. In some cases, it even has 0% interest.

Is Debt Consolidation Right for You?

There are various strategies for debt consolidation which can be used. One widely used technique is the transfer of outstanding balances from different credit cards to a single new credit card which has introductory 0% interest rate. In this way, the borrower can save greatly on the interest as long as they repay the total outstanding balance before the introductory period expires.

In general, the idea of the consolidation loan is to clear all current debt and to be easier to repay. In many cases, borrowers use home equity loans or lines of credit in order to clear existing debt. This strategy is highly effective because home equity credit comes at a much lower interest rate due to the fact that collateral is involved. At the same time, since the house is placed as collateral the risk of losing it in case of default on the loan is present.

How Debt Consolidation Works

The process is not straightforward. It requires preparation. If you have mounting outstanding debt and you struggle with its repayment, you should see a credit counsellor or another type of specialist such as a financial advisor. The professional will look into your current accounts and analyse your financial situation. Then he will suggest ways in which the difficulties can be overcome.

Once the strategy has been decided upon, you will need to apply for the respective type of debt consolidation loan. The application process does not differ from the one for other loans. You will have to provide sufficient information for the lender to run a credit check on you. The main factor which the lender will base their decision on is your ability to repay the loan. The affordability of the loan for you will be determined based on your monthly income and expenditure. The application can lower your credit score by a few points. This will not be a great issue, but you have to make sure that you will apply to one or two lenders at the most as many applications can cause serious damage.

Qualifying for Debt Consolidation

In order to qualify for debt consolidation, you have to be perfectly capable of repaying the new loan. The income left after you pay all your bills and cover all your living expenses for the month should be sufficient for making the monthly instalment on the loan. Your credit history should be good if not perfect. One or two past delinquencies may be acceptable for a lender, but you should not have other blemishes on your credit record.

Debt Consolidation Myths

It is a common misconception that there are no closing costs associated with taking out a debt consolidation loan. Most lenders will charge a percentage of the total loan amount in the form of a fee. This fee is paid up front. If you are offered a loan without such a fee you should stay away from this product. This is because the fee is typically wrapped into the loan amount and you will have to pay interest on it for the whole term of the loan.

It is a myth that you are required to accept the terms and conditions offered by the new lender and that you have no other move. Most lenders are open to negotiation even though they do not advertise it. You can negotiate the interest rate, the monthly instalments and the repayment schedule.

Debt Consolidation Assistance

Since debt consolidation is not simple, you will benefit greatly from using credit counselling services. The counsellor will examine the financial situation which you are in and recommend the most effective method for consolidating your debt. The professional will assist you with improving your budgeting and spending pattern so that you can avoid getting into debt trouble in the future.

The counsellor will provide assistance and support with the search for a loan which comes with lower interest rate and comfortable repayment schedule. The specialist can provide help with improving your credit score as well. You should definitely take advantage of this option as a higher score will boost your chances of securing a lower interest rate.

Common Questions – Debt Consolidation SA >


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