What You Should Know About Debt Consolidation
Debt consolidation is a plan that combines all of your unpaid debts into a single monthly payment. This is usually achieved through a debt consolidation loan. A consolidation loan will reduce the balances to zero on the accounts included then requires you to make monthly payments to the loan company in place of your numerous creditor.
When you dealing with a high amount of debt, your more than likely dealing with some high monthly payments as well. If you find yourself paying month after month and not seeing the balances going down fast enough due to high interest rates, debt consolidation could consolidate the payments into one and provide you with a lower interest rate so you start saving money and start seeing your balances reduce faster then before.
Not everyone fully understands how debt consolidation works. It's important to speak with a professional about these matters as not all loans are beneficial. To determine which loan is righ for you, it's important to factor in any all fees associated with the loan company. The experts at Gold West Financial will walk you through this process every step of the way to make sure you feel confident you're making the right financial decision.
Debt Consolidation Does Not Reduce Your Principal Balance
Some people are under the impression that debt consolidation will reduce the balance they owe. When interest is charged on a credit card debt, the interest is added to the total principal balance which then becomes part of your principal balance meaning the more interest you get charged the bigger the principal balance is. Although debt consolidation loans will not reduce the interest that has already accumulated, it can reduce the amount of interested being charged on the balance itself moving forward once the loan is accepted.
To determine how much interest you can save, lenders will take a look at your credit profile. They will look at several factors such as your FICO score, your debt to income ratio, your utilization, as well as the history on your credit report. These guidelines vary per lender and are typically not disclosed.
Consolidating Your Loans Simplifies Your Debts
This is an excellent benefit. When you consolidate your debts, making monthly payments gets simplified. In previous instances which you would have to pay several creditors one by one as opposed to just one simple monthly payment. This helps to ensure payments are made on time and manage debts a lot easier as everything is all in one place.
Debt Consolidation Could Shorten Your Term
Debt consolidation can save you a lot of time and money depending on what type of debts your including and the interest rate you are able to receive. For credit card debt specifically, interest is charged on a daily basis and compounds meaning every day that goes by your getting charged more interest based on the balance. Because the interest gets added on the next day, you then get charged more interest on that new balance until you make your monthly payment. With a loan however, you receive a simple interest rate meaning interest is fixed and charged on the balance borrowed, not daily like credit cards. This can save you years of making payments and thousands of dollars of the line of the loan. With no prepayment penalty, the loan can get paid off faster thus saving you more interest as well.
Your Credit Score Plays An Important Role
The relevance of your credit score cannot be ignored. Your credit score is the statistical representation of the likelihood that you will be able to stick to the initial agreement reached with your lender. The credit score is calculated based on a number of factors based on your loan history but isn't the only factor when determining eligibility for a loan. Lenders also want to make sure you can pay them back so even if your credit score is lower than the next person, you still might get approved if your overall income and debt to income ratio are in better shape.
So, there they are––the things you should know about debt consolidation. We hope this helps you to make a wise, helpful financial decision soon.