How debt consolidation works
As we have commented previously, you have to take into account several things. The main ones are:
Check out your expenses. You must understand why you have these debts. If you have accumulated many because you spend more than you earn, a loan that helps you consolidate your debts may not be your best option. First, you should reduce your expenses to enter more than you spend.
Get a quote. Analyze if you can pay your existing debt if you spend less for some time.
Talk to the entities to find out if they agree to reduce your expenses. Some may be willing to accept lower monthly payments, reduce the interest rate, or extend the term, so you have more time. Thus, if you get your income to be higher than expenses, these can be outstanding options.
That said, the mediating companies that are dedicated to the reunification of debts that they do is cancel all the outstanding loans you have.
What they do is contact the financial institutions or institutions to which you owe money to be able to renegotiate the conditions and thus cancel the payment. Next, they ask for a new loan with a different interest and a separate payment term.
When they have all this, you will sign the contract with the new company that has acted as a mediator. But, keep in mind that before signing anything, you carefully read all the conditions of the contract and solve all the doubts you have so as not to make any mistakes. You must understand even the fine print.
Debt consolidation risks;
In some situations, consolidation maybe your best option. But, it is good that you also know the risks you can have when you want to consolidate your debts. Some of them are:
More long-term interests. When you unify your debts to a loan, it is easy for the monthly interest rate to be lower, but how it is achieved hides something important: in the end, you end up paying more for the same debt. Think that long-term interests are more significant because what you do is extend the life of the mortgage.
It can be an expensive operation. Apart from the debt, you will have to face processing and formalization expenses. Also, there will be new commissions. And he thinks there may also be additional interests.
Commissions are usually high. Being financial intermediaries, they will charge you a series of commissions for having advised you. In some cases, they range between 3% and 5%.
There may be reluctance or demanding requirements of the entities. Financial institutions can demand a lot from you. Apart from proof of home or work, you may also be required to show a stable income. It is a way to make sure you can afford the loan payments.
Advantages of debt consolidation
You reduce your monthly expenses. When all your debts are consolidated, the minimum monthly payment of the new loan is less than the sum of all previous payments.
You go from managing many debts to managing just one. This way, you can better manage your finances since expenses will be more simplified.
You can choose the new repayment term or the amount of the fee you wish to pay.
Disadvantages of debt consolidation
You extend the time you will be paying. We mentioned it before, but it is good to repeat it. When you join all debts into one, this loan will be for an amount high enough to extend the time it will take to pay it.
It may involve a higher interest rate. You must know what the interest rate of this loan will be that allows you to consolidate your debts. Thus, you can calculate how much money you would have to pay in interest with the new rate and how much you pay with the current ones.
You may pay extra fees for early cancellation. Keep this in mind, because if you decide to pay before you can get more expensive.
You can find more about debt consolidation or payday loan consolidation.