People in debt are often confused about the right way forward – the right way to work on repaying those debts and getting their finances well and truly under control again.
It’s true that there can be quite a few ways of doing this, but choosing the right debt solution for you needn’t be as complicated as you might think.
Why? First of all, because you have access to expert advice – all kinds of organisations offer advice over the phone or face-to-face, and you’ll find all kinds of guides online. And secondly, because quite a few of those debt solutions wouldn’t even be an option for you.
If you’ve never really looked into the subject before, debt consolidation loans may be the only actual debt solution you’ve even heard of. But do you know how they work? Do you know if a debt consolidation loan would be right for you? Do you know how the interest issue would work out?
How does debt consolidation work?
It’s a pretty simple approach to understand: you’d borrow money to repay your debts all in one go. Once you’d done this, you’d have just one debt – the debt consolidation loan itself. This can be far simpler than dealing with multiple debts, since you’d have one debt, one creditor, one interest rate and one payment to make per month.
It’d also be much easier to see how much you still owe (without having to add up multiple balances) and how long you’ve got to go before your debt is cleared altogether.
Should I consolidate my debts?
This depends on your situation. A debt consolidation loan is something that can help someone who wants to simplify their finances and/or wants to reduce the amount they pay towards their debts every month. It’s not suitable for someone who’s facing serious debt problems and doesn’t know how (or if) they’re going to be able to repay what they owe.
What about interest?
The interest rate on a debt shows you how quickly a debt grows while you’re paying it off. The higher the rate, the faster it’ll grow (although your payments should still be bringing the total down over time).
If you decided to consolidate all your existing debt, you’d need to take a good look at the interest rate on any loan you might be offered. If it’s substantially lower than the rates you’re paying on your current debts, that’s a good start.
You could choose to repay the debt consolidation loan slowly
Arrange to repay your new loan slowly and you could significantly reduce the amount you’re paying every month – simply because you’d be repaying the money over a longer period of time.
However, you could pay a lot more in the long run this way – your debt would be around for longer, so it’d have more time to accrue interest.
You could choose to repay the debt consolidation loan quickly
Arrange to repay your debt consolidation loan quickly and you could pay a lot more per month – simply because you’d be repaying the money over a shorter time period.
Having said that, the overall cost could be significantly lower – your debt wouldn’t be around for as long, so it wouldn’t have as long to accrue interest.