3 reasons debt consolidation can be a good route to debt reduction
Used responsibly credit has many benefits and can be a great convenience. If you are able to effectively manage your credit it is likely that you will have no problems at all. However it is when people lose control of their finances that credit becomes harmful and ultimately turns into debt. This creates a cycle in which you are no longer paying interest simply on the principal; you are paying interest on the interest. This debt cycle leads to a situation in which paying off your debt may seem impossible. However there are ways to escape the debt cycle.
Debt reduction can be difficult. By making only the minimum repayments every month and keeping the forms of credit that got you into debt in the first place can result in you going nowhere. In this situation it is like you are simply treading water. One possible solution is debt consolidation. Debt consolidation may help you reduce your debt and can result in you actually eliminating your debt within a relatively short time frame.
Debt consolidation is the process of taking all your debt (credit card balances, overdrafts, store cards and so on) and consolidating it into one low interest loan that gives you one easy, manageable payment to meet monthly. Debt consolidation can be an appealing method of debt reduction as it has the potential to reduce every aspect of your debt. For example debt consolidation can:
- Reduce the amount of time your debt is paid
- Reduce your interest
- Ensure that each payment reduces a large amount of your principal debt
Reduces the amount of time the debt is paid
By simply making the minimum monthly repayments you are in effect prolonging the debt cycle. In some ways this could be regarded as a two steps forward, one step back approach. The problem with high interest rate debts is that only a small percentage of your payments actually go toward reducing your principal. In contrast, with debt consolidation you can choose the term that the loan is paid in, normally three to five years. If possible you should choose the shortest term available in order to receive the most significant savings. Although your monthly payments may increase, the interest you pay is reduced drastically.
Reduces your interest
Through debt consolidation it may be possible to:
- Reduce the amount of interest you pay
- Reduce your interest rate
- Reduce the amount of time that it takes for you to pay off your debt
By opting for a short term you can significantly reduce the amount of interest you are to pay. Debt consolidation loans also offer a reduced interest rate which will assist you in making significant savings.
The benefit of debt consolidation is that you are able to take all your multiple debts with high interest rates and convert it into a single low interest debt. Debt consolidation can allow you to halve your interest liability. For example, most credit cards and overdrafts often charge in excess of 20% interest. The interest charged on a debt consolidation loan is significantly less than that.
Each payment reduces a large amount of your principal debt
With a reduced interest rate you can start to focus on reducing your actual levels of debt as a greater percentage of your monthly repayments go toward repaying the principle. In contrast credit cards only allow you to reduce a small amount of your debt because so much money is going toward interest. Simply put, the lower the interest, the quicker the principle in repaid.
If managed correctly, debt consolidation is one of the most effective methods of debt reduction. Debt consolidation may allow you to pay less interest, reduce the term of the debt and look forward to a debt free future sooner.
If you would like to find out if debt consolidation is appropriate in your situation then fill in the following form or call Debt Relief on 1300 658 662 and our staff will assist you.
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