Debt consolidation can be advantageous for the credit score and lead to the reduction of monthly installments. Discover why it is advisable to use a debt consolidation company.
In the current world where people are struggling to make ends meet, many are in a position where they have taken several loans that include credit card balances, personal loans and even medical bills.
It is always tough to handle these debts because each of them has its own interest rate, due date and terms of payment. This is where a financial debt consolidation company can be of great help in this process.
Consolidation is useful in debt management, whereby a number of debts are combined with the help of a loan that is usually offered at cheaper rates as well as better repayment terms.
In this article, we will look into some of the advantages that you can get from a financial debt consolidation company so that you will be able to determine if it is suitable for you.
7 Benefits of Financial Debt Consolidation Company
Debt consolidation allows you to combine several debts into one easy payment, which will ease your burden. Find out the advantages of hiring a debt consolidation firm.
#1. Simplified Debt Management
Another great advantage of hiring financial debt consolidation company is that your debt management process is made easier. If you have more than one loan, it becomes difficult to remember different due dates and the interest rates, as well as minimum monthly payments. A payment can be made with a penalty and if it is not made on time, one’s credit rating will suffer.
When you consolidate your debts, you are able to make a single monthly payment for all the debt. It also helps you not to forget your payment deadlines and simplifies the management of your financial affairs. This is because with a single loan to manage, one can easily arrange his/her financial plans and thus manage the loan effectively.
Example: Think about having five different credit cards and each of them has the due date and the interest rate. However, if you are to consolidate all these debts into one loan, you only have to remember one due date and one interest rate, which makes life easier.
Also Read: 5 Key Reasons To Have a Financial Advisor in Business
#2. Lower Interest Rates
The other benefit of debt consolidation is that one can easily obtain a lower interest rate on the consolidated loan as compared to the rates for the several debts. That is why high interest rates, especially on credit cards, are not easy to deal with, as a major part of the monthly payment goes towards the interest charges rather than the actual balance.
Through debt consolidation companies, one can be offered lower interest rates if, for instance, you have a good credit score or if the consolidation loan has been backed by an asset. This was because with lower interest rates, more of the monthly payment goes to paying off the principal balance faster; hence, in the long run, you end up paying less.
Example: If you’re currently at 20% on credit card balance, taking a loan at 10% interest to pay the balance and clear the credit card will save you a lot of money in terms of interest in the long run.
Also read: What are the Features of Debt Consolidation?
#3. Fixed Repayment Schedule
It is common to find that, when an individual has multiple debts, then the repayment terms differ. Some credit cards have variable minimum payments, which depend on the balance that has been carried forward; hence, one cannot be sure of the amount to pay at any given time.
Debt consolidation firms often provide loans that come with a fixed time within which they are to be paid. This implies that you will have a constant installment that is payable every month and a definite time when all the debts are going to be cleared. Knowing the exact amount that is required to be paid monthly and the time that is required to pay off the debt can give a lot of comfort and can help in planning the finances in a much better way.
Example: It is less risky than, for instance, $800 per month because you clearly understand that by paying $500 per month, you will be debt-free in 5 years, and this fact does not cause any uncertainty in a financial plan.
Related: The Role of an Experienced Investment Advisor in Financial Planning
#4. Improved Credit Score
Your credit score is an important aspect of your life since it determines your worthiness for credit and the amount of interest you will be charged, among others. If you have several balances to pay and credit card debt in particular, your credit utilization ratio, which is the amount of credit currently being used in relation to the total amount of credit available, may be high and thus affect your credit score.
The following are some of the ways through which debt consolidation can enhance the credit score. First, by paying off your credit cards and other high-interest debts, you increase the credit utilization ratio, which is one of the factors of credit score. Second, if you pay your consolidation loan on time, your credit history will show this kind of payment behavior, which again increases your score.
Example: If your credit card balances are near the credit limit, then you can get a loan that will have a lower utilization ratio and hence gradually help in improving credit score.
#5. Reduced Stress and Anxiety
This is more so because people who have multiple debts are likely to be financially stressed. The constant concern for making payments on time, different interest rates, and how to avoid extra charges will put a lot of stress on an individual and may affect his or her health.
When you consolidate your debts, you get rid of much of this stress. This is because you only pay one time, the interest rate is relatively low, and the payment period is definite, meaning that the financial status remains in your hands. It can also relieve the pressure that one feels due to financial constraints and enable you to attend to other aspects of your life.
Example: An individual struggling with several due dates on the debts might feel a lot of consolation after consolidating them because he or she knows how to go about it to ensure that he or she is free from debts.
#6. They also raise the likelihood of lower monthly payments.
Debt consolidation also leads to the reduction of monthly payments since these are offered by the new loan agreement. If you pay by installments, then the monthly installments can be reduced, and this can be very useful, especially if you have problems paying your monthly bills.
Lower monthly payments imply that you can spend the money on other things you need, save for emergencies, or put money into something that may bring you more money in the future. But it must be understood that even though having a longer term reduces the monthly payment, it increases the total interest charged for the total number of months.
Example: For example, if you are paying $1,000 for several debts on a monthly basis, then you can get relief when consolidating the loans and getting a loan that requires only $700 monthly payment.
#7. Access to Financial Consultation and Help
Many of the debt consolidation firms not only offer loans but also offer consultation on the same. They may be very helpful in teaching you how to go about managing your money, how to allocate a proper amount for each need, and how to prevent the occurrence of other types of debt.
In any case, it is always wise for one to consult a financial planner so that he or she can be advised on how to go about his or her financial matters. This added support can be especially useful if you’ve been in debt for quite some time and need help on how to begin the process of rebuilding your financial life.
Example: A debt consolidation agency may offer courses that teach how to handle your money, an appointment with a counselor, or an online facility to monitor your spending and budget for the future.
Conclusion
Debt consolidation through a financial debt consolidation company has its advantages, including easy management of debts, lower interest rates, and less stress.
Debt consolidation helps you regain control of your financial situation, enhance your credit rating, and start the process of debt freedom by combining all your debts into a single loan. However, one must be very careful when selecting a debt consolidation firm, and it is advisable to read all the terms of the loan agreement before proceeding.
When done right, debt consolidation is one of the most effective strategies that one can use in order to free himself from the bonds of debt.
