Managing your finances is a challenge all on its own. It becomes much harder when debt piles up. The situation gets even worse when you have multiple loans with different terms to think about.
To take back control, you can consider debt consolidation. This simplifies repayment so you’ll keep track of only a single loan instead of several different ones.
In this guide, you’ll learn all about this strategy and how you can apply it.
What is debt consolidation?
Debt consolidation is a strategy for getting out of debt that involves taking out a loan to pay off existing obligations. You are basically rolling multiple, smaller debts into a single, larger loan.
There are lenders that offer loans specifically for debt consolidation. You can also apply for a multi-purpose or personal loan to use for this strategy.
Is debt consolidation a good idea?
Here’s an overview of the pros and cons to know if debt consolidation is the right move:
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Take note that consolidation is just one way to deal with debt. You might still be able to manage multiple loans at the same time if the amounts are relatively small and you’re earning enough to pay on time.
This method is an option if you’re struggling to keep up with due dates and you want to simplify your finances.
How to apply the debt consolidation method
If you think debt consolidation is the way to go, here are the steps to take:
Step 1: Calculate your existing debts
Review your financial situation and assess your debts, whether they include a home loan, car loan, personal loan, or revolving credit.
Add up your outstanding balances including interest. This amount will reflect how much money you’ll need from a consolidation loan.
Step 2: Review your budget
Check your monthly budget to know how much money you can allocate for debt repayment. This will give you an idea of the monthly payment terms you should look for in a loan.
Step 3: Study your options
Compare different loan options from reputable and legitimate lenders. Review the loan terms including monthly payments, interest rates, and any fees or penalties that may apply.
The right choice might be the one that fits your budget and gives you the best chance to make on-time payments.
Step 4: Apply for a loan and make payments
Choose the ideal loan that meets your needs and financial capacity. Then, submit all required documents and take the time to double check the fine print before signing any agreement.
Once approved, some lenders might pay your existing debts on your behalf. Others will send the loan amount to your bank account so you can make the repayments.
With your new loan in effect, it’s best to avoid taking on additional debt that can drown you in even more bills. You might also need to cut back on spending until you’re in better shape financially.
