How Debt Consolidation Works and How It Can Help you Find Financial Freedom

It is worryingly easy to accumulate debt and it often starts on a small scale with a credit card balance, a car loan, and an overdraft, for instance, but without even noticing, in the beginning, the amount you owe gets larger and the repayments less manageable.

Servicing all that debt across a range of different lenders can take its toll on your financial situation and you might even find yourself in a position where you are not able to meet all of the monthly repayments.

One potential solution to this problem is debt consolidation and this option is well worth considering if you are struggling to keep up with current payments and want to try and take better control of your financial situation.

How Debt Consolidation Works and How It Can Help you Find Financial Freedom
How Debt Consolidation Works

If you want to talk about debt consolidation you should be able to find a location where help is available. In the meantime, here is an overview of how debt consolidation works and why it could offer a viable path to financial independence.

The clue is in the name

If you have accumulated a number different debts, typically including loans and credit card balances, you might be concerned that your financial position is under too much strain because of all of the different monthly payments you have to make.

Debt consolidation involves putting all of your debts into one single loan by consolidating the balances into one amount, paying off these balances, and making one monthly payment to pay off the total balance over a period of time.

You are not reducing your borrowings at this point in time so you will have the same level of liabilities that you had before but the fundamental difference is that you are amalgamating what you owe into one loan and one single monthly repayment.

One of the primary reasons why it works for a number of different borrowers is mainly due to the fact that you can often negotiate a lower interest rate for the new loan, compared to what you were paying on your credit cards, for example, plus the monthly repayment is often lower than the amount you would have to pay if you were repaying separate loans.

Why you might want to consolidate your debts

Debt consolidation is not an option to take lightly as it is still a substantial commitment and even though the prospect of lowering your monthly payments will doubtless seem attractive you should still think it through carefully and confirm why it is an option that works for you.

Have a detailed look at your financial situation and take the opportunity to work out exactly how much you owe, what sort of interest rate you are paying on each form of borrowing, and how much your monthly payments come to every month.

It is also a good idea to calculate how long it is going to take to clear your debts in their current format.

If you can clearly see that the interest rate you will be charged for debt consolidation is lower there is the chance that you can make some substantial savings on the total amount of interest you pay.

Being able to decrease the cost of borrowing should help put your finances in better shape once you start to feel the benefit of using a debt consolidation option.

Reducing the strain on your monthly finances

Another solid reason for thinking about debt consolidation is that it should allow you to lower your total monthly debt repayments.

If you are making one single monthly loan payment that is lower than the total you are currently servicing that should release funds that you can then use for savings or to pay off other bills not covered by the loan.

Easier to manage

One of the major drawbacks attached to having lots of different loans to pay back each month is that you have to remember what day of the month each one has to be paid by.

It can be easy to forget to make a payment on time every now and again, but that can be bad news for your credit score if it gets recorded as a missed payment on your file.

You don’t want to do anything that harms your credit score as that makes it harder to get offered finance in the future. This is why you might find that applying for a debt consolidation loan takes away the stress and hassle of trying to remember all the different due dates.

Having just one debt repayment to think about each month should make it a lot easier to manage and there is less risk of forgetting and leaving a blemish on your credit record.

Check before you apply

Unfortunately, if you leave it late in the day to apply for a debt consolidation loan and you already have some missed payments and an adverse credit rating, that might not prevent you from getting a loan but the interest rate you are offered might be higher because you are perceived to be a higher risk borrower.

It would be prudent to check your credit file before you make any applications so that you can see what lenders are saying about you and what sort of score you currently have.

Making too many applications for credit can be detrimental to your credit score and will reduce your borrowing options. This is why it is a good suggestion to check your score and maybe talk about your situation with a broker so that they can source the best option for you.

Debt consolidation requires discipline

One of the fundamental reasons for taking out a debt consolidation loan is to make a fresh start and tidy up your financial situation so that you are in better shape going forward.

What you don’t want to do is get further into debt, so you should be prepared to rein in your spending habits and make the most of the chance to improve your financial position.

Debt consolidation can offer a route to financial freedom provided you use the option wisely and make the most of the chance to improve your bank balance through lower repayments and reduced borrowing costs.

Thanks for stopping by today, I do hope you’ve found this post useful in some way.

You may find the posts in my personal finance section helpful

rachel bustin

*This is a guest post


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