Consider The Pros And Follow Strategic Steps For Successful Debt Consolidationby Silvia W. blogger
You can get rid of your multiple debts by consolidating them into one in a few steps. Sounds impressive, isn’t it? However, to follow these steps are easier said than done. You will need a proper plan, due diligence and consider all those factors that may influence your effort some way or the other.
Therefore, when you apply for a consolidation loan, you must first know the up and downsides of it and make sure that you follow the steps just as required to optimize your debt consolidation.
The pros and cons
A debt consolidation loan comes with its characteristic pros and cons. Just as this loan is a great option that can bring your finance back on track regularizing your monthly repayment schedule, these can also harm your finance as well in the long run. Therefore, it is imperative that you know the pros and cons of it before entering into a loan consolidation.
· With no more requiring juggling your multiple loans and payments, this will ensure that you cash flow is conserved. You will not feel the cash flow emergency anymore and look for desperate measures to eliminate the negative side effects. The loan consolidation approach will bring a kind of equilibrium back into your finances with its lower interest rate and longer terms, meaning you will have to make smaller monthly payments. With that said, this loan will take you a long way to help you save lots of money, provided you qualify.
· You will be able to tidy up repayment to your multiple lenders as there will be no confusing bills anymore with different amounts due and due dates to remember. You will be able to maintain you budget and finance well without any fear of missing out any payments mistakenly as you will have just one monthly payment to make and just one creditor to deal with. Therefore, a debt consolidation loan will make it easier to pay your bills on time and prevent any penalties and interests from accumulating with your outstanding debt amount pushing you even further into debt. Most importantly, it will not harm your credit score which is a big achievement due to the features of such loans.
· Debt consolidation loans come with a few disadvantages as well in spite of all its virtues. One of the notable downsides is that you will have to pay interest on interest. This is a surprising factor as most people believe that consolidation loans lower the interest rates as well as reduce the monthly payments but sadly that is not the whole story. When you consolidate your debts you are actually paying down the total amount of your initial loans that includes the principal as well as the interest. That means the new and low interest that you will now pay on your debt consolidation loan will also compound on the actual initial interest on your original loans. As a result, you will end up paying interest on interest, of course at a much lower rate.
· Over time you will also pay more interest especially if you take out a long-term debt consolidation loan. Even the rate of interest is low it is the extended life of the loan that will keep the total cost of capital growing which may be more than the loans you want to consolidate with it.
· Lastly, a debt consolidation loan may not necessarily be a cure-all. It will surely help you with the cash flow conservation but that will be typically temporary. This is because the installment payments are much lower. However, most people find them in such a situation having multiple loans because they borrow much more than they can repay. Therefore, if you face any financial setback in the due course of time you may find yourself back is the same situation from where you started even though the debt consolidation loan may well and truly lower the monthly payments.
You may even find yourself in a worse situation if the lender of the consolidation loan charges any penalty for late payment. Therefore, before you decide to take on such a loan make sure that you weigh the pros and cons and eventually borrow considering the debt consolidation ratings from your findings.
The steps to follow
If you have decided to take out a debt consolidation loan and qualify for it there are a few steps to follow to make sure that it works for you just as expected.
· Start by identifying your current debts. Take a look at all your existing loans along with the details of each. Make a note of the outstanding amount of each loan, the name of the lender, the rate of interest each carries, the maturity and due date, and also the repayment schedule.
· Next you should check for the prepayment penalties if any. This is an important factor to consider because with a debt consolidation loan you will be paying off several smaller loans with one large loan. Sometimes, paying off a loan before its maturity date may trigger some prepayment penalties.
· Follow this up by determining the total amount of debt now that you have all the relevant details of each of your debts as well as the prepayment penalties. This will help you to choose those particular debts that you want to combine into your large consolidation loan. Add up all the balances so as to get the amount that you need to pay off and apply for it to the consolidation loan lender.
· Make sure that you also calculate the average APR or the Annual Percentage Rate of all your existing loans. This will help you to calculate the rate of interest of the new loan to beat it. However, calculation of the APR is not the same as the interest rate of a loan. It is actually the annual interest plus all types of fees that determines the actual cost of the loan.
Lastly, compare the APRs of different lenders and look for the best one to take out your debt consolidation loan.
Created on Mar 26th 2019 06:55. Viewed 775 times.