With the regular usage of credit cards, many people face issues clearing their dues. A credit card is an easier option, but it is also a vicious cycle that keeps increasing with time. This is because of poor management and the unhealthy habit of using credit card features.
However, debt consolidation loans are one of the most acceptable ways to build discipline and organize your finances. If you are still unaware of how it works – this article will help clarify the concept of these loans.
Keep reading and help yourself!
What are debt consolidation loans?
When you use your credit cards for making bulk purchases frequently, you will likely have multiple debts on your card. Furthermore, these dues will have variable interest rates as well. As a result, it might not only shake your financial situation, but you might also end up paying more.
Hence, a debt consolidation loan combines all your debts with a single interest rate and one due every month. This will help you save money on the interest cost and repay the loan in an organized manner.
However, the debt consolidation from each bank has its policy and conditions. To understand this loan better, you might have to explore the concepts in depth.
Benefits of debt consolidation loans
If you want to streamline your finances, it is essential to explore the benefits of a debt consolidation loan. Thus, below is a list of benefits that will help you decide on the correct type of loan.
- Quick repayment: When you have the habit of using credit cards, it isn’t easy to be able to pay back the loan quickly. Additionally, a minimum payment stretches the loan duration and increases the interest cost. Debt consolidation helps you repay the amount quickly without worrying about bulk compensation.
- Better interest rates: Imagine paying 20-25% interest rates on different loan amounts! Wouldn’t it extract every penny from your savings? To save yourself from this hassle, merging all the loans and following a single interest rate is essential. This will increase the interest rate to 10%, depending on your credit history.
- Simplify the EMI: With a busy lifestyle, tracking the multiple EMIs that you might have to pay every month is difficult. Thus, a single due every month makes it easier for you to understand your finances. It eliminates the hustle between multiple EMIs.
- Fixed repayment: Most debt consolidation loans are based on a fixed schedule. This means you will know when the entire debt comes to an end. Such a concept helps you plan your finances and make wiser decisions in the future.
Therefore, to get the maximum benefit out of a debt consolidation loan, it is essential that you understand the factors that decide the interest rates. Head on to the following section!
Factors affecting the interest rate of a debt consolidation loan
No matter how much a debt consolidation arrangement helps, you will have to pay back more than you borrowed. However, the interest amount depends on your credit card’s history.
Generally, the interest rate for debt consolidation varies from 5.99 to 35.99%. Thus, below are the things to keep in mind to get the lowest interest rates:
- The higher the credit score, the lower the interest rate
- Lenders often look at the debt-to-income ratio to determine the interest rate
- You need to verify the employment and show proof of income
Therefore, it might seem easier to repay the loans after looking at the concept of debt consolidation. However, it is not the solution to all your financial problems.
Neither will it help you repay debt until you bring discipline to expenditure habits.