Debt consolidation reduces your monthly balance by combining all of your credit card bills and loans into one single location. This will lower your interest rate and your monthly payments. However, it will not reduce your outstanding debt. Nevertheless, debt consolidation is still an extremely appealing option for debtors with considerable debt since it can stretch the payment period over a longer time frame.
Here is a scenario so you would better understand debt consolidation. For example, you have two credit cards and one personal loan which you are regularly paying per month. For the first credit card, you are paying $100 per month with a balance of $1,000. For the second credit card, your monthly balance is $50 and your outstanding balance is also $1,000. Your personal loan’s monthly balance is $80 and has an outstanding balance of $2,000. Your total monthly payment if lumped together is $230 and the total outstanding balance is $4,000.
From the above figures, you will see that the total monthly payment is difficult to handle especially for those who are struggling to make ends meet. If the total payment per month is reduced, it may possibly permit you to make extra payments. It will then reduce your debt a lot faster. This is where debt consolidation becomes helpful. Your credit card bills and loans will be lumped together into a single loan with a much lower interest rate. This will is an effective debt reduction technique since it lowers the monthly payment fee. The amount of time to pay off the loan will also be shorter. In five to ten years you might be able to completely pay off your debts. In the example above, the total amount is $4,000 with 11.5% interest rate which is payable over four years. The total monthly payment is $104.35 which means you save $125.25.
A lot of banks offer debt consolidation loans. In spite of this, not everyone is eligible for debt consolidation. Your eligibility depends on the trust that your bank places on you. This is many individuals prefer to take out their home equity loans to consolidate their debt. In general, if your credit rating is low or if it has been damaged greatly, it would be hard to be approved for a loan. If in case you have been approved for a loan, the interest rate would be unreasonable. An approach to getting a lower interest rate is to submit your home mortgage as collateral for payment of your loan. Bear in mind that you are putting your property at risk since they can take it if you do not pay your loan.
If you like this article, you can also check out this debt consolidation article.