Debt consolidation is the process of combining different loans (they may be of different types, with different balances, from different banks, with different terms, and with different Variable Percentage Rates or VPR) into a single loan. This requires applying for a new loan, using the funds obtained from that loan to pay off the existing loans and then maintaining (i.e. keeping payments current) on the new loan.
Some would say debt consolidation involves too much work. It means tons of paperwork, negotiations, credit checks, and all other things that applying for a loan requires. Debt consolidation, furthermore, requires paying debt consolidation service charges. Are all the effort and the fees worth it?
Certainly; debt consolidation has many benefits. The following are only a couple of the major ones:
Debt consolidation means you only have one instead of several loans. This means easier maintenance of all your financial obligations. Just think about it. Which is easier: rushing off to pay three or four separate loans monthly – all with their own due dates and minimum balance requirements – or paying only one loan each month?
Debt consolidation means you will no longer have any difficulty keeping track of your loan obligations. You will no longer send a check mistakenly to Bank A when it was Bank B that needed urgent payment. Through debt consolidation, you only need to wait for one bill and mark one due date on your calendar.
Better Budgeting and Planning
Isn’t it difficult to stick to your budget when bills are always due? If you have several loans, you are probably dealing with multiple due dates. Perhaps one loan is due in the first week, another in the next, yet another in the third week, and one more in the last week. Meanwhile, your monthly salary only comes once or twice a month.
How then will you be able to pay off those bills that come too early (before your salary arrives) and those bills that come too late (when all your salary has been used up)? In this scenario, it will seem like you’re doing nothing but pay your bills; you will probably be even wary of using your money for other necessary expenses because you’re afraid you’ll run out of money by the time your next loan bills come.
If you consolidate your debts, you will only have one due date. Every month, you know that you need to pay “this and that” amount by “this and that” date. Since you need to make only one payment each month – and since you have a fair idea about how much the payment is going to be – it will be much easier to put aside a fixed amount of money for debt servicing and thus free the rest of your money for other necessary spending