How Debt Consolidation Works

Loans can be life-savers, but only if you manage them well. They can help you handle financial emergencies fast. Some people have even used them to make life-changing decisions like buying a house or starting businesses. Sadly, if you struggle with making payments, they can end up being a burden.

This is the reality some people have to live with, especially if they are servicing multiple credit accounts. From having to track repayments to dealing with loans at different interest rates, managing your debt portfolio can become stressful. Worst of all, if you miss some payments, you could start receiving calls from lenders, not to mention the danger of watching your credit score decrease.

Lucky for you, if you are in this situation, debt consolidation could provide you with the peace of mind you deserve. Read on to learn how debt consolidation works and the debt consolidation benefits.

What is Debt Consolidation?

Debt consolidation is simply taking out a new large loan to pay off your other liabilities. It helps combine other smaller debts into one large loan, which often comes with a couple of payoffs. You can enjoy a longer loan repayment term, a lower interest rate, or even both. 

For instance, if you had applied for a loan at a fixed interest rate and the market rate has dropped, personal loan consolidation could help you finance your liability at a lower interest rate. However, consolidation doesn’t reduce your liability. It simply makes the repayment terms more manageable. Considering how much of a burden it can be to service multiple loans, debt consolidation is a much welcome remedy.

How Debt Consolidation Works

Debt consolidation requires you to pay the same balance as you currently have in debt but allows you to enjoy more favorable repayment terms. It also can take you a step forward toward your goals of financial freedom and independence. Lenders are willing to consolidate debt since it increases the chances of the consumer meeting their financial obligations.

Many credit unions, banks, and credit card companies help their clients consolidate contingent on good standing and credit checks. When you work with us at Superior Financial Services, we may offer you this service even if your credit score is subpar.

Debt Consolidation Vs. Debt Settlement

One thing to note as you learn how debt consolidation works is that it doesn’t erase your original debt. Among the biggest debt consolidation benefits is that it will reduce the number of debtors you have to deal with and could lower your interest rates while extending the repayment period. 

Debt settlement, on the other hand, looks to reduce your obligation as a consumer rather than the number of lenders you get to deal with. You will need to work with credit relief/counseling companies to achieve this. These companies simply negotiate with your lenders for the desired results.

When is Personal Loan Consolidation Worth it?

Someone writing the word aproved on a board

Debt consolidation offers a light at the end of the tunnel. Since managing multiple debts can be hectic, it lightens this burden. It also makes you more financially disciplined. For instance, it might take ages to clear credit card debt if you are only paying the minimum monthly repayments and thus accruing higher levels of interest in the process.

Consolidation ensures you can start paying a specific amount (almost always higher than minimum credit payments) to accelerate how fast you can become debt-free. One thing to know about how debt consolidation works is that it isn’t worth it in every situation. It will be ideal if:

  • You are committed to paying the amount due in full
  • You a healthy enough cash flow to manage repayments
  • You don’t plan on running up on debt again
  • Your credit score has increased since taking the original loans
  • You are ready to make repayments over a longer period or don’t mind making early payments

When is Debt Consolidation a Bad Idea?

Debt consolidation isn’t a magic cure-all for your financial concerns. It doesn’t address the underlying issue of the spending habits that result in debt. Empower yourself and learn how debt consolidation works, and with dedication and discipline, you can get yourself back on track!

In case you can manage to repay your current liabilities within six months to a year at your current pace, personal loan consolidation might not be beneficial enough. However, you can still pursue it if you believe it will give you some peace of mind. 

Lastly, if your personal debt accounts for more than half your income, consolidation might not be the best course of action for your situation. The better option would be to seek debt relief to salvage your credit score and gain some peace of mind. 

Practice Financial Discipline

Being disciplined financially is among the best ways to avoid getting caught up in excessive debt. You ought to track your debt status and know when to borrow and when not to. Now that you know how debt consolidation works and its benefits, it should be easy to make a decision. Feel free to contact us for debt consolidation services and for learning what options on recovering from debt are best for you.