Debt consolidation combines several debts into one larger debt. It is often taken by people who find high-interest debts burdensome.
You can use a debt consolidation loan for credit card debts, auto loans, student loans, and other types of loans. Afterward, the borrower would only pay a single monthly payment rather than separate payments.
Besides streamlining your finances, debt consolidation offers more favorable loan terms, including competitive interest rates.
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Repay your debt sooner
Opting for a debt consolidation loan could enable you to fast-track debt pay off, especially if you have substantial credit card debt. Credit cards don’t have a timeline for paying off the balance. But a consolidation loan will have a fixed schedule every month from the beginning to the end of the loan.
The advantage to this is if you repay your debt faster, you will be paying less i犀利士
nterest. Moreover, the quicker the debt is paid, the sooner you can start investing money on other goals such as an emergency or retirement.
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Simplify your finances
With debt consolidation, you no longer have to be hassled about multiple due dates every month because you will only need to make one payment. Moreover, you know exactly how much money to set aside since the payment is the same amount each month. This simplifies your budgeting process and helps you to make payments on schedule.
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Obtain lower interest rates
The average credit card rate in the past year is around 19.94%. In comparison, the average personal loan rate is 14%. Of course, the rates will vary contingent on your credit score as well as the loan amount and length of the term. But in many cases, you will get a lower interest rate with debt consolidation than what you are paying on your credit card.
Debt consolidation for borrowers with an excellent credit score will typically have lower interest rates than the average credit card.
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Fixed repayment schedule
If you are consolidating your debt, you will know what amount is due every month as well as the date of your very last payment.
With a fixed repayment schedule, the payment and interest rate remain the same for the entire loan period. The loan will not be subjected to unexpected fluctuations in your monthly debt payments.
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Improve your credit score
Initially, debt consolidation may lower your credit score to some extent. You will be going through an extensive credit analysis. But over time, your score will improve. The reason for this is it is easier to make on-time payments—thirty-five percent of your credit score factors in your payment history. Therefore, paying a single monthly bill when it is due should boost your score.
Also, if you have an old debt from credit card and still use your card, you will have a stronger history with credit. Thirty percent of your credit score accounts for amounts owed. The length of your credit history accounts for 15%. These two factors could negatively impact your score should you close your cards after paying them. It is recommended to keep them open to help maintain your credit score.
Debt consolidation can significantly uplift your credit score. It is especially true if you make timely payments on your loan. Your payment history is the most significant measure in calculating your credit score.
