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What Is Debt Consolidation And How It Can Help You

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Are you struggling to pay your debt and looking for ways that can help you provide a stress-free life? You may have wondered, “Are consolidation loans a good idea?” The answer is yes, debt consolidation loans can be the answer to debt relief.

Due to the pandemic, people worldwide are experiencing financial havoc. They are desperately searching for debt-relief options. Unfortunately, many look at credit cards as the only way to pay their debt, and in the process, they neglect the higher interest rates and get stuck in a debt trap.   

Utilizing debt relief programs for debt consolidation is an excellent approach. This loan option offers a swift and convenient way to repay your outstanding balances by leveraging its low interest rates, allowing you to settle your debts rapidly.

man in debt considering debt consolidation

What Is Debt Consolidation?

Debt consolidation is a financial solution to consolidate small loans, bills, credit card balances, and overdraft balances into one monthly payment. Instead of paying interest on multiple debts, consolidating them will reduce your financial burden.

After consolidating them, you have only one monthly payment, and that reduces the overall interest rates. It will also aid you in saving money on interest fees and paying off what you owe faster.

How Does Debt Consolidation Work?

In the process, you ask the creditor to loan you the lump sum money to pay off small loans or bills. The process is complete once you’ve provided them with all the basic information and documentation. Then you wait for their approval. Once approved, you will receive your funds which you’ll then use to pay off your existing debts.

Is Debt Consolidation A Good Idea?

The reason why people prefer debt consolidation is that it is relatively easy to qualify for, and they also get approved easily. So if you need to get rid of debts with low interest rates, this is the way to go.

However, it is worth remembering that debt consolidation is not the only option available for you if you are struggling with debt. You can, with the help of a good debt settlement company, pay back your debts via a customized plan that has been agreed upon with each individual creditor; file for bankruptcy; or even DIY your own debt settlement plan.

There is no standard way to pay back your debts, and the approach you do end up taking should instead be tailored to your needs and repayment ability. 

How Does Debt Consolidation Help You Pay Your Debt?

Debt consolidation helps to settle your small loans with even smaller interest rates. In addition to this, it also helps you manage multiple debts by combining them into one monthly payment. Hence, it provides you with a hassle-free way to repay debts.

4 Reasons Why Debt Consolidation May Be Right for You

While debt consolidation isn’t for everybody, here are some reasons why you should consider it:

1. Helps Simplify Your Finances

It helps you simplify your finances and you don’t need to track all your smaller debts–you only have to pay one monthly payment.

2. Saves You From Penalties

In most cases, debt consolidation will save you from the penalties that may otherwise arise due to mismanagement of the debts. Monitoring multiple debts at the same time may be cumbersome, and something may always slip under our noses.

Merging the smaller loans and consolidating them into one monthly payment will help you save money.

3. Helps You Maintain Your Credit Score

When you have multiple debts, keeping a record of all of them can be a tough task. For instance, you might forget to pay the EMI on time.

If you combine all the debts, then you only have to remember one monthly payment. Hence, debt consolidation directly helps you maintain your credit score.

credit cards like this one may not help when in debt like debt consolidation can

4. Can Help You Get Lower Interest Rates

It helps you pay off your debts at low-interest rates. Therefore, you can save money and also pay off your debt faster.

It’s also a much better option than a credit card because of low interest rates. If you leverage it effectively, it might prove to be one of the best financial solutions.

Downside Of Debt Consolidation

When people take a consolidation loan, they often feel great about it because they now have only one monthly payment to pay, and that too, with lower interest rates. Most of the time, the new monthly payments are lower than the existing ones. Hence, they have more room to manage their finances.

However, instead of utilizing it and making a sound financial budget, they tend to overspend it. Most people seem to not even notice/remember that they’ve taken a loan to pay debts.

Soon enough, they find themselves in a position where they might need another debt consolidation loan. It only worsens their financial situation.

Hence, creating a budget and checking your expenses is the key to unlocking the doors of a debt-free life. The best thumb rule is to always spend less than you earn.

Can You Get Debt Consolidation With Bad Credit?

In case you’re going through a financial downslide or you don’t have a trustworthy credit history, you’ll be relieved to know that many lenders in Canada provide loans to people with bad or no credit.

However, in the case of a bad credit score, you will have to pay high-interest rates for the debt consolidation loan. Hence, you may not be able to benefit from what debt consolidation is actually meant to do, i.e. low-interest rates.

Moreover, a debt consolidation loan improves your credit score if you’re prompt about your monthly payments.

Final Thoughts on Debt Consolidation

Debt consolidation will help you pay your smaller loans with lower interest rates. It helps you to pay off your debts faster and even save some money. It also helps simplify your finances because you don’t have to keep track of your smaller debts.

You only have to follow the monthly payment cycle. However, you need to be careful when using debt consolidation loans because people usually fall into the trap of using the money to live a lavish lifestyle. Therefore, create a plan keeping your financial goals in mind if taking the loan is the way you choose to go.

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