Debt consolidation is what allows you to pay off smaller loans, liabilities, and consumer debts by taking out one big loan. Using this tool, multiple debts are consolidated into a single, larger debt which leaves you with just one monthly payment rather than many.
It is handy while you are dealing with a student loan, credit card, and other debts and liabilities since it offers a lower interest rate and monthly payments.
Broadly, there are two main types of debt consolidation loans- secured and unsecured. While applying for a secured loan such as a car loan or mortgage, you have to pledge some property for the security of loan repayment.
Whereas, unsecured loans are offered only on your repayment promise such as credit cards. Such loans come with higher interest rates due to a higher risk factor.
How Does Debt Consolidation Work?
In this process, payments are made on the single new debt till the time it is fully paid off. The first step to apply for debt consolidation is through your bank, credit card provider or a credit union.
If you have maintained a good relationship and healthy payment settlement history, it gets easier for you to get approved for such loans. Otherwise, you may have to knock on the doors of private lenders if the situation gets worse.
Various financial institutions and firms specialize in providing debt consolidation solutions and services to the general public based on their financial standing.
Why Should Millennials Care About Debt Consolidation?
Generally, millennials spend a significant proportion of their monthly income on repayment of multiple debts such as personal student loans, credit card bills, mortgages, car loans, etc. Thus, it’s crucial not to let the ever-growing debt statements pile up and consolidate them as much as possible.
To apply for debt consolidation loans, firstly, it’s important to look into your financial profile. Calculate debt-to-income ratio, use loan calculator to find out total debt amount, check credit score and bank statements.
Some Key Advantages of Debt Consolidation for Millennials
This tool is one of the best ways to get out of the debt trap. Here are some pros of debt consolidation, which are practical, especially for millennials.
Faster Repayment of Debt
A debt consolidation loan helps you pay off your total debt faster as a single monthly payment needs to be done. Faster repayment of debt means that you have to pay less interest overall.
It saves your money, time and energy. The fast implementation process has dual benefits of better loan management and swift control over their finances.
When your debt gets consolidated, you no longer need to worry about multiple payments throughout the month. It is usually a single payment you need to be ready for. Moreover, the amount to be paid is the same each month. Thus it simplifies budgeting and finances.
Reduced Monthly Payments and Lower Interest Rates
People with good credit score applying for consolidated loans have to pay significantly lower interest rates than the usual credit cardholder. Furthermore, the monthly payment amount in case of consolidation loans, especially secured loans is lesser than the sum of individual loan payments.
Fixed Repayment Schedule
In case of a fixed repayment schedule, both the payment amount and interest rate remain the same until the entire loan is paid off without any variation in the meantime.
Improves Credit Score
Since debt consolidation doesn’t lead to breaking down older loan agreements, your credit rating doesn’t respond negatively. On the contrary, it helps to improve it.
Your payment history and statements are among the most crucial factors contributing to your credit score calculation. So regular payment of a single monthly bill within its due date will significantly upgrade your score.
What Are the Disadvantages of Debt Consolidation for Millennials?
Consolidating your debts come up with some drawbacks too. Before deciding upon debt consolidation, you must consider your circumstances. Here are some cons of consolidating your loans.
No Assurance on Solving Financial Problems
Consolidating debt doesn’t guarantee that all your financial problems will be solved in one go. Your spending habits could get you back to trouble even after the debt is fully paid off. Thus it’s important to take account of spending and sticking to a pocket-friendly budget.
Better financial behaviour, along with debt management through consolidation, can put you in a more upright position.
Involves Upfront Costs
Consolidation of debt comes with certain upfront costs in fees such as loan origination, balance transfer, closing costs and annual maintenance fees. The fees charged varies from firm to firm. Hence you must research and ask for all the charges involved in the debt consolidation process.
You May End up Paying More
A debt consolidation loan may come up with a higher interest rate than currently paid. Generally, it occurs with people having lower credit scores than the ideal. Moreover, in the case of loan term extension, you may have a lesser monthly payment, but it may cost higher than the usual loans in the long run.
A Secured Loan Comes Against Your Assets
A secured debt consolidation loan or mortgage comes against your assets such as home and car. It implies that the pledged assets are at risk of repossession if you are unable to repay.
Check this to find out more about debt consolidation loans.
Before applying for a debt consolidation loan, you should look into your financials and review your monthly expenditure and devise a strategy to repay the loan considering the expected loan term. It’s equally important to keep in mind the upfront costs associated with the loan term.
Furthermore, you should retrospect the habits and circumstances that led to the debt mountain to grow further on and reflect on the root causes. Consolidation is just a way to relieve your debt trap, but it is not the complete solution to your financial stability. Overspending and ineffective budgeting can worsen the situation even more.
For availing of the benefits of debt consolidation in the most efficient manner, you should maintain a good credit score. An ideal score has better chances to qualify for lower interest rate loans.