It can be disheartening to work hard but feel that you’re not getting ahead. If you’ve fallen behind in paying your bills, you’re might now feel you’re only going to work to relieve your debt burden.
But, here’s the thing: you’re not stuck with your debt even if you can’t figure out how to earn more to pay it all off. There is a way out of this mess.
You can’t see the solution hiding in plain sight because you’re focused on what’s not working. Perhaps, too, you spend most of your time fretting over your increasing credit card balances. Repaying the high interest rates might even be at the expense of putting food on the table.
Despite how trapped you feel, there is a way past your recurring struggle: debt consolidation. Let’s take a closer look at this financial instrument to see how it works and how it could help you.
What Exactly Is Debt Consolidation?
Debt consolidation is a debt relief option. It rolls up similar kinds of debts into one monthly payment. This strategy makes it far easier to pay off all your debts. Braidwood Capital explains that a consolidated loan merges all your unsecured credit card debts in a low-interest rate loan. It reduces your outlay. It cuts your interest rates. And it makes your life simpler with a single monthly payment.
A Structured Debt Repayment Plan
You should not consider a consolidation program as a new type of financing. It doesn’t replace old debt because you’ll still owe the same creditor.
Here is a step-by-step overview of how it works:
- Calculate how much you can afford to pay after covering your living expenses every month.
- Work out a repayment plan for all the debts. What amount can you afford to pay from your budget to repay your bills? Remember, while you may still pay interest during your repayment—it won’t be as much. If not entirely eliminated, your creditor will normally reduce interest rates and waive penalties.
- The main thing is to stick to your plan. You must be consistent. You can’t stop paying during tough months–those months when your income drops or your expenses rise. You have to stay true to your agreed repayment schedule. Consistency makes structured debt payment work because it shows creditors how committed you are to paying off your debts on time.
- The specific arrangement of the repayment plan will depend on the debt you owe. Paying off a student loan debt will differ from paying off a medical debt, for example.
Benefits of Debt Consolidation
Debt consolidation is an efficient and cost-effective way to pay back everything you owe to various creditors.
Here is a shortlist of the benefits:
- It’s a recognized, structured approach that creditors like because it reassures them that they will get paid.
- It will cut, if not completely bypass, credit damage. This is a risk that occurs with many types of debt repayment plans.
- It will simplify the entire process of managing your bills every month. You won’t have to figure out how much you can afford to pay from each paycheck based on the amount or due date of a bill. Instead, you’ll pay all your bills once a month. Again, it’s one bill once a month.
- It will reduce how much you have to pay because you’ll mainly pay on the principal. A creditor may cut out all interest charges or reduce them.
- It will lower your monthly outflow while speeding up how quickly you repay your debt.
Consolidated Loans vs. Debt Settlements?
How does a consolidated loan compare to a debt settlement plan, another popular debt reduction strategy?
It’s a far more desirable option than debt settlement because it does not damage your FICO score. You get out of debt quicker because you pay on the actual debt, the principal, rather than focusing on the high-interest charges. And it’s more flexible, too. You can use it for all kinds of debts: credit card debts, student loan debt, medical debt, tax debt, or military debt. Of course, if you have different types of debts, you might need more than a single debt consolidation plan. Talking to a qualified loan expert can help you decide which loan is right for you.