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Everything You Need To Know About Debt Consolidation and How It Works

Jul 4, 2022

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Debt consolidation is the process of combining all your debts into a single, more manageable loan. It can be an effective way to get out of debt and regain control of your finances. But it's important to understand how it works and what to watch out for before you consolidate. This article will give you everything you need to know about debt consolidation so you can make an informed decision.

1) What is debt consolidation?

Debt consolidation is the process of taking out a new loan to pay off multiple debts. This can be an effective way to get out of debt because it simplifies your finances by consolidating all your payments into one. It can also help you save money on interest because the new loan will likely have a lower interest rate than your individual debts. When planning to consolidate your debt, first look at your overall financial picture to see if it's the right move for you. Then, compare offers from multiple lenders to find the best terms.

For example, let's say you have $5,000 in credit card debt with an interest rate of 20%. You also have a $10,000 personal loan with an interest rate of 10%. If you consolidate these debts into a single loan with an interest rate of 15%, you would save $500 in interest every year.

2) How does debt consolidation work?

There are two main ways to consolidate your debt: with a personal loan or a balance transfer credit card.

Personal loans are best for consolidating multiple debts with different interest rates. You can get a fixed interest rate and repayment term, which makes it easier to budget for your payments. But keep in mind that you'll need to qualify for a loan based on your credit score and income.

Balance transfer credit cards are best for consolidating debt onto one card with a 0% intro APR period. This can help you save on interest and pay off your debt faster. But keep in mind that balance transfer fees will apply, and you'll need to have good credit to qualify.

3) What are the benefits of debt consolidation?

There are several benefits of consolidating your debt, including simplifying your finances, saving on interest, and improving your credit score.

Simplifying your finances: When you consolidate your debt, you'll have one monthly payment to make instead of multiple payments. This can make budgeting for your debt repayment easier and help you stay on track.

Saving on interest: Consolidating your debt onto a single loan with a lower interest rate can help you save money on interest. This can free up money in your budget to pay off your debt faster.

Improving your credit score: consolidating your debt can also help improve your credit score by reducing your credit utilization ratio. This is the amount of debt you have relative to your credit limit. A lower credit utilization ratio can help improve your credit score.

4) What are the risks of debt consolidation?

There are a few risks to be aware of when consolidating your debt, including taking on a longer repayment term and losing certain benefits.

Taking on a longer repayment term: When you consolidate your debt, you may be able to get a lower monthly payment by extending your repayment term. But this means you'll pay more in interest over the life of the loan.

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Losing certain benefits: If you consolidate your debt with a personal loan, you may lose certain benefits, like the ability to negotiate a lower interest rate or monthly payment.

5) Things to keep in mind when consolidating your debt

There are a few things to keep in mind when consolidating your debt, including your overall financial picture, the type of consolidation you choose, and the terms of your new loan.

The terms of your new loan: When consolidating your debt, pay attention to the terms of your new loan, including the interest rate, repayment term, and fees. Compare these terms to your current debts to make sure you're getting a good deal.

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Consolidating your debt can be a great way to simplify your finances, save money on interest, and improve your credit score. But before you consolidate, make sure you compare offers from multiple lenders to find the best terms. Be aware of the risks involved in consolidating your debt, including extending your repayment term and losing certain benefits. And finally, make sure you understand the terms of your new loan before you consolidate. Keep In mind that consolidation is just one tool to help you get out of debt.


NCFA Jan 2018 resize - Everything You Need To Know About Debt Consolidation and How It WorksThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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