Having a better burden relief plan.
With inflation and a rising economy, it's becoming normal for people to take loans to achieve some of their life goals or even solve emergencies. Loans and debts, however, have to be paid back. A lot of people are finding themselves in a fix, as they do not know the best way to pay without lagging or accruing more debts.
This is why knowing about debt consolidation and reduction strategies is a smart move for any individual in debt or planning to take out loans.
While debt helps to get out of financial crises or begin or finish projects, it is also very stressful and financially draining to pay back all the interest. There is also the possibility of defaulting and waking up one day to an auction. Not to mention, there is also the financial stagnation and roadblocks from having existing roads, and saving properly becomes difficult.
Getting out of debt should be a priority because it helps in:
Accessing other services without the stigma of having existing loans.
Peace of mind from being debt-free.
Ease of saving and building wealth.
Improving your credit card score.
Allows for financial security and flexibility.
Debt consolidation is a strategy whereby all your debts are merged into one, and the terms and conditions for repayment are set such that it has a lower interest rate. It may also offer better repayment conditions, such as an extended deadline for repayment.
This is lucrative, as it avoids the desperate measure of taking more personal loans to offload existing loans and debts. Existing tools for doing this are consolidation programs and balance transfer cards, which allow you to transfer an existing credit card debt from one or more cards to a new card.
When you ask yourself, is debt consolidation a good idea? Rest assured that it is. Especially if you have changed your money-spending habits to be healthier. If you're disciplined and took out debts out of necessity or to build something, then yes, this is a good choice for you.
Here are some reasons why:
Simplified payment methods
Lower interest rates
faster payoff.
Credit score boost
Overall lower monthly payments.
Fixed interest rates.
This method includes paying off the small debts first while simultaneously making minimal payments to the other existing debts. Once the small debt is finished, switch to the next smallest debt and begin the process again until it is done.
Pros
Boosts motivation to pay off debt due to small wins
Improved credit card score over time.
Simple to adhere to
The amount to be used remained the same, depending on how you strategized.
Once a loan is done, it's done, thus reducing the mental worry of juggling multiple debts at once.
Cons
Indifference to interest rates: sometimes the smallest loan does not have the biggest interest.
It may take longer in the long run to complete all the debts.
This method involves paying off debt from the highest interest rates to the lowest ones, regardless of the balance.
Pros
Saves money on interest.
Encourage responsible financial behavior.
Pay debts faster.
Provides structure that is easily tracked for progress.
Cons
It may not work for people who are easily demotivated.
Requires consistent self-discipline.
It may take time to see positive results from your debt reduction.
This depends on a variety of factors for the debt holder, since both methods have their share of advantages and disadvantages.
If you're disciplined and a hard worker with limited streams of income, then the avalanche method may be your best bet.
If you're driven to save money and have multiple sources of income, then snowballing is the best since you can be able to make multiple payments at once.
If you qualify for lower rates and are looking to change financial habits, then consolidation is the best alternative.
Remember
Use digital tools to track your payments, balances, and payoff dates. To make it easier, you can even automate some of these payments to avoid defaulting or diverting funds. While undertaking this process, it is recommended to understand how credit scores work, as they are a good measure of your financial track record.
Consolidation essentially restructures existing debt into a new loan, whereas snowball and avalanche use existing accounts to rank and prioritize repayments.
Yes.
As long as you don't have a rigid agreement with the financial institution that you are transacting with.
Temporarily.
It can lower your credit score as a result of a hard credit check. Aside from that setback in the beginning, once you stay consistent with the repayments, your score automatically improves with time.