With financial stress mounting in recent years, it’s easier to get into debt than get out of one. If you feel cramped for space while juggling several accounts like credit cards, home loans, education loans, personal loans, and other liabilities, it’s time to explore debt consolidation as an alternative. Even if your credit score is lower than average, or you have negative incidents on your credit record, financial experts can help you tap viable resources that you might not have considered before. For example, the experts at Alpine Credits can help you evaluate your financial strengths and get a debt consolidation loan.
In this article, you will get to know about debt consolidation loans in detail. This way, you can work your way out of poor financial conditions without much issue. Let’s explore the scope of debt consolidation and find out whether this option suits you in the first place.
What does debt consolidation involve?
You can streamline your finances by consolidating multiple debts into one account with debt consolidation. Since you’re bringing several loans with high-interest rates into a single statement, the overall interest rate would also be lower. You’ll only need to make a single monthly payment at a lower interest rate to pay off your debt over time effectively.
Often, you might find yourself overwhelmed with different due dates for payments, multiple bills, and different interest rates. Debt consolidation serves as an effective instrument to tackle such challenges. Making a single timely payment would serve your purpose. However, if poor spending habits lie at the roots of your financial challenges, consolidating your debts won’t be a permanent solution.
While processing debt consolidation loans, financial institutions evaluate your credit score and repayment habits. Accordingly, they might decide to grant you a personal loan for debt consolidation or provide you with a home equity loan.
When is debt consolidation a viable process?
Debt consolidation might not be a good idea for everyone. Particularly, if you have your financial records in a mess or have an excessively poor credit score, applying for such a loan can even hurt your records. The best way is to approach Alpine Credits, where the professionals can evaluate your financial health and recommend the right process.
- Usually, debt consolidation is a great instrument to streamline finances for individuals with several loan accounts with high interest. However, the financial institution would inspect whether or not your credit score has improved after you obtained these loans originally. In other words, they would evaluate your repayment habits and assess whether or not you are a responsible borrower.
- A habitual defaulter with poor money-management skills can default even with the debt consolidation loan. In case your credit score doesn’t look too impressive, a debt consolidation loan wouldn’t be of any good to you.
- If you have a very small debt that you can manage to repay within six months or so, it’s wise not to go for a debt consolidation loan. There might be processing charges to shell out, which would nullify the savings you could have made on the interest.
Moreover, you need to address the underlying issues that led you to the debt trap, such as overspending. For instance, a debt consolidation loan wouldn’t be effective if you habitually make impulse purchases and have multiple debts on credit cards. Even if you manage to settle the debts now, you will run into the same debt cycle a few months later.
Instances when you should go for a debt consolidation loan
Before applying for a debt consolidation loan, weighing your financial strengths under the standard parameters makes sense.
- Check out whether your monthly debt payment is lower than half your gross income. These amounts might include your mortgage, rent, education, personal, car, business, and any other debt account. You can apply for a debt consolidation loan if your income can cover your loan amounts.
- You have a strong credit score that looks healthy enough to qualify you for a low-interest loan for debt consolidation. However, if the credit score is not too good, you might end up paying interest rates that are higher than normal. In such circumstances, it would not be advisable to take a debt consolidation loan since the overall interest rate might not be very different from what you’re currently paying.
- You have sufficient cash flow to cover the payments to manage your debt after consolidating the same. If necessary, you can try and cut off habitual bad expenses.
- Even if you are eligible for a debt consolidation loan, a long tenure implies that you would be paying more interest in the long run. This would eventually be of no benefit to you. Try to pay off the loan in a span of five years at most. Even if you are eligible for a longer tenure, such as seven years, settling for a lower duration would be advisable.
Individuals with sensible spending habits and responsible repayment records should go for debt consolidation. Make sure to make the repayments on time so that you don’t end up spoiling your credit score. However, if your credit score isn’t particularly high, consider a home equity loan as a long-term means of repayment and improvement.
Endnote
It should be clear that debt consolidation can be a tactical instrument to get out of your debt cycle. However, you need to be calculative when applying for one of these loans. Without proper knowledge of your repayment capacity or credit score, the process can backfire in a big way. You might end up in the same debt trap, or end up doing more damage to your credit score than good.
So, it would be advisable to consider the professional advice of financial experts that deal with loans. After meticulously scanning your financial profile, they can provide you with the right kind of guidance to resolve your issues. However, it’s essential to cultivate healthy financial habits to repay the loan, even after taking expert advice into account.
With this approach, you can quickly get yourself back on track with your financial situation and work towards improving your credit score at the same time.
