Most people are not able to repay or manage their debt and are drowning more and more with each new term being added. If you are looking for a simpler way to be out of debt or even so control it, then Debt Consolidation is the right choice. You might be wondering what is Debt Consolidation? Here we are going to tell you about it and share the Pros/Cons of Debt Consolidation to help you manage your debt.
What is this Debt Consolidation?
Debt consolidation is the process of combining series of shorter loans to make a singular larger loan. Ideally, the consolidation loan also comes with a lower interest rate compared to your existing loans. So, when times are tough, the less stressful information you have to process, the better.
In simpler terms, the Debt Consolidation combines your auto loans, credit card debts, medical debt, student loans, and all types of loans into a single brand-new loan. In this way you, the borrower, will have to make a singular payment every month instead of covering them separately. So, here you get a managed debt to cover.
Lastly, Debt Consolidation simplifies the finances and can give the borrower extra favor in the long term. With that being said, here are the Pros and Cons of Debt Consolidation in Mortgage.
- First Note:
With many decisions to be made, especially about which debt to pay off, the first debt consolidation can provide a simpler way to repay multiple loans and make it easier to view your financial situation holistically.
However, one of the biggest positive effects of debt consolidation is the liberating feeling you get when you shift from having four or five monthly payments to just having one. It can help you to free up cash flow for other priorities, maintain a positive mindset, reduce debt stress, and ultimately lift some of that weight off your shoulders. Plus, it can give you a fresh payoff date, which can both motivate you and provide peace of mind.
- Second Note:
There are two ways in which Debt consolidation lowers monthly payments for debts. It allows an individual to extend the repayment period for debt. Since, the debt will be repaid over a longer time, each of the debt payments will be less. Keep in mind that owing money for a longer period means that interest must be paid for a longer time, which results in paying more money over the longer period
The second way in which debt consolidation decreases monthly debt payments is by lowering interest rates for debts. Unsecured debts like credit cards and store cards usually carry a high rate of interest. By using a consolidation loan that has a lower interest rate, an individual may reduce monthly payments, based on how quickly the consolidation loan will be repaid.
Fixed Rates or Term Attached:
In case you are using a personal loan to pay off your debt, then you’ll know how much is due each month exactly and when your very last payment will be. Pay only the minimum with a high-interest credit card and it could be years before you pay it off in full.
Note: By having a fixed repayment schedule, your payment and interest rate remain the same for the length of the loan while there’s no unexpected fluctuation in your monthly debt payment.
For most people money is a form of Stressful. According to some reports, 60% of respondents consider money to be a cause of stress for people. This can be because of having multiple debts. Having many different monthly payments, due dates, and accounts can leave you feeling like you’re constantly paying bills. This is hard enough to manage when things are calm. It’s much more difficult when other stressors show up as well.
Consolidating debt during stressful times is one way to lower the anxiety you may feel about your finances. Anna Barker, a personal finance expert explains, “Consolidating debt during stressful times can be a good idea simply to avoid — or at least reduce — any stress caused by the debt you’re carrying.”
Andrea Woroch, a nationally recognized financial expert, agrees with it. Woroch adds that consolidating debt not only makes it easier to manage your payments, but you’ll also probably save money on interest. This further helps reduce the stress associated with debt.
Boosted Credit File:
While a debt consolidation loan may initially lower your credit score slightly since you’ll have to go through a hard credit inquiry, a debt consolidation loan may help improve it over time. All of this is because you’ll be more likely to make on-time payments.
Your payment history accounts for 35 percent of your credit score, so paying a single monthly bill when it’s due should significantly raise your score. Additionally, if any of your old debt was from credit cards and you keep your cards open, you’ll have both a better credit utilization ratio and a stronger history with your credit.
Note: Consolidating debt can ultimately improve your credit score. Particularly, if you make on-time payments on the loan, payment history is the most important factor in the calculation of your score.
Lower Interest rate than Previous Loans:
As of July 2021, the average credit card rate is around 16 percent. While the average personal loan rate is below 11 percent. The rates may vary depending on your credit score and the loan amount and term length, but you’re likely to get a lower interest rate with a debt consolidation loan than what you’re currently paying on your credit card.
Note: Debt consolidation loans for consumers who have good credit typically have significantly lower interest rates than the average credit card.
In case you’re overpaying your mortgage, you don’t just get the advantage of paying interest on a smaller amount of debt. Overpaying also means your loan to value ratio falls faster. if your LTV falls, it means when it comes to remortgaging, you may be able to get a cheaper deal than if you hadn’t overpaid.
So, you’ve got a sizeable savings pot. In another case, if you’re overpaying month by month, by using savings to reduce your mortgage borrowing and cutting your LTV, you may get access to cheaper rates. You’ll need to be close to one of the key trigger LTV thresholds where acceptability increases substantially and cost drops for overpaying to make a difference.
Imagining you are and the savings are huge. As a rough rule of thumb, the main thresholds are;
95% LTV; Above this, you won’t be able to remortgage at all.
90%, 85%, 80%, 75%, and 60% LTVs; Go below each of these and the top mortgage deals get cheaper.
Equity Reduction in property:
Whenever you borrow money against your mortgage, you are losing your owned home equity on that property. If your owned home equity is around 20% or the mortgage is already around or above 80% of the value of your home, it will be very difficult to borrow more money.
You must own a good portion of home equity and once you have consolidated or paid off all of your debts by using the mortgage, a major or the entire of the equity will be owned by the lender itself.
Higher Rate/ Longer Mortgage Term:
Your debt consolidation loan could come at a higher rate in comparison to what you currently pay on your debts. This can happen to you for a reasonable variety of reasons. One of the reasons includes your current credit score while Additional reasons include the loan amount and the loan term.
Extending your loan term could get you a lower monthly payment, but you may end up paying more in interest in the long run. As you consider debt consolidation, you need to weigh your immediate needs with your long-term goals to find the right solution.
Note: Consolidation does not always end up reducing the interest rate on your debt, particularly if your credit score is less than ideal.
Serious Consequences for Missing Payments:
In any case, you missed one or any of your monthly loan payments, then you’ll likely have to pay a late payment fee. In addition to that, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These added fees or extras can increase your borrowing costs greatly.
Some lenders typically report a late payment to the credit bureaus after it becomes 30 days late. In this case, your credit score can suffer serious damage and this can make it harder for you to qualify for future loans, ultimately getting the best interest rate.
To reduce your chances of missing a payment, enroll in the lender’s automatic payment program if it has one.
Note: Before you take out a debt consolidation loan, make sure you can afford the monthly payments. Missing a payment can point forward to late fees and a lower credit score.
It never solves Financial Problems on its own:
Consolidating debt never guarantees that you won’t go into debt ever again. If you like to live beyond your means and cross the limits, you might again feel being in debt. To help avoid this, make yourself a realistic budget and stick to it. You should also start building an emergency fund that can be used to pay for financial surprises so you don’t have to rely on your credit cards and ultimately drown in debts.
Note: Consolidation can help you pay the debt off, but it will not eliminate the financial habits that got you into trouble in the first place, such as overspending or failing to set aside money for emergencies. You can prevent more debt from accumulating by laying the groundwork for better financial behavior.
Some debt consolidation loans come up with extra fees on top and you might not know about it. These upfront fees can include;
- Closing Costs
- Balance transfer Fees
- Annual Fees
- Loan Origination Fees
In case you are thinking about taking the debt consolidation loan out, you can ask about all the fees including the late payment ones or paying the loan off early.
Note: you need to research the print with focus while considering the loans of debt consolidations. This is done to make sure you have full knowledge of full costs.
Not Qualifying for it:
There are still chances that you might not have qualified for Debt Consolidation but the question is can you? Well, the answer here depends on your circumstances. Here are some scenarios where you might get a chance;
You have a good credit score; If you have a good credit score (at least 670), you’ll have a better chance of securing a lower interest rate than you have on your current debt, which could save you money.
You prefer fixed payments; If you prefer for your interest rate, repayment term, and monthly payment to be fixed, a debt consolidation loan might be right for you.
You want one monthly payment; Also, taking out a debt consolidation loan could be a good idea if you don’t like keeping track of multiple payments.
You can afford to repay the loan; Finally, a debt consolidation loan will only benefit you if you can afford to repay it. If you can’t, you’ll risk digging yourself into a deeper financial hole.
So, before you start signing the debt consolidation by looking at the shiny pros, you should give a focused review on the minimum current monthly payments or the time you have to simply repay the debt. Then, you should give a detailed comparison to the time and expense of a debt consolidation loan.
Only if the debt consolidation is affecting the finances, you can go for it or if you have a problem calculation the Debt consolidation you can use the free calculator for its calculations. Finally, you should remember both the Pros and Cons of Debt consolidation in Mortgage, taking a note of what causes your debt mountain and try to make a solution for relieving them. Debt consolidation might seem like a relief immediately but it alone can’t solve this problem, you have to work along with it.
THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP YOUR REPAYMENTS ON YOUR MORTGAGE.
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