5 Key Benefits of Unsecured Debt Consolidation

debt consolidation
debt consolidation

Debt is an unavoidable part of our financial lifecycle. However, how you use this debt defines your relationship with money. For instance, a mortgage used to climb up the property ladder helps you build an asset. However, using credit irresponsibly can push you into a pool of debt.

We all make mistakes when it comes to credit. Even if you have too much debt to deal with, you can find a way out as long as you’re determined to improve your relationship with money. Addressing your financial problems instead of living in denial is the first step in the right direction. 

If you have multiple loans to deal with, keeping up with repayments can be challenging. Debt consolidation can help you combine all your debts into a single, convenient loan. Read on to find out the 5 key benefits of using an unsecured loan to consolidate your debts.  

What are unsecured debt consolidation loans?

Debt consolidation is a great way of dealing with high-interest debt, such as credit card debt. Herein, you combine two or more debts into a single one. So, instead of paying monthly instalments for each of these loans on separate events, you will have to repay only the new loan. This not only eases your financial burden but also helps you organize your debt. Moreover, an unsecured debt consolidation loan will allow you to combine your debts with collateral. 

You can use a debt consolidation loan to organize a combination of loans, such as a credit card debt, student loan, medical bills, auto loan, etc. The new loan would pay off all your outstanding obligations, leaving you with only a single debt to settle. Thus, you should carefully choose your loan amount. Plus, you may find a debt consolidation loan with an interest rate lower than what your ongoing debt accrues you. 

Are low-interest debt consolidation loans ideal for me?

Debt consolidation loans are often a go-to choice for those with a decent credit score. A good credit score will help you qualify for better loan offers, which may reduce the effective cost that the loan incurs you. Thus, a shorter term and a low interest on debt consolidation loans can help you save money on interest. 

While it is essential to compare the interest rates on a loan, considering your loan term, you shouldn’t oversee the additional costs associated with the loan – the APR. The APR or Annual Percentage Rate gives you the overall cost of borrowing, including additional costs such as the arrangement fee, early repayment fee, etc. A loan with a low interest rate may have a higher APR. So, weigh your option carefully, keeping all parameters in mind before choosing one. 

How to find the best debt consolidation loans?

When you begin your search for debt consolidation loans, UK wise, you’ll find a myriad of options to choose. Here’s how you can ensure that you choose the right one:

  • Calculate what you need: A good way to start would be by adding all of your outstanding debts that your consolidation loan would pay off. Your circumstances may improve in the process, and you may want to repay the debt early. So, keep the additional costs, such as the early settlement fee, in mind. 
  • Decide on a loan term: The loan term is the time that you’ll take to repay the money, which makes it a crucial part of your application. Each of your monthly payments accrues interest. So, the longer your term is, the smaller your monthly instalments will be. But, a longer time will incur more interest. 
  • Work on your credit profile: Your credit score is pivotal in determining the lender’s interest rate. Thus, your credit report is worth improving. Besides, tracking your credit score helps you keep any discrepancies in check. If you happen to find one, you can get it rectified by contacting the credit bureau. This could give your credit score a boost. 
  • Shop around for offers: While shopping around for loan offers, try to find offers with low interest rates and low overall costs. A loan with a shorter term and lower interest rate can save you a lot of money. 
  • Have a repayment plan: Ideally, you should choose a loan amount that you can afford to repay because failing to keep up with your repayments can be detrimental to your credit profile. A repayment plan can help you ensure your timely repayments. And while you’re at it, develop a contingency plan to deal with changing financial circumstances. 

5 benefits of using an unsecured debt consolidation loan

Here are 5 key benefits of using an unsecured debt consolidation loan:

  • Repay your debt sooner: Debt consolidation loans are time-bound loans with fixed monthly instalments. The ability to track your repayments helps motivate you to pay off your loan sooner. The sooner you settle your loan, the less you end up paying in interest. You can use this money to support your savings goals, such as an emergency or a retirement pot. 
  • Organize your finances: When you have multiple loans, it is easy to lose track of the outstanding balance, repayment date, interest and penalties for each. Debt consolidation helps you organize various, high-interest debts into a single, convenient loan. This way, you’ll know exactly what you’ll have to pay at the time of repayment.  
  • Simplify repayments: A debt consolidation loan helps you simplify your repayment cycle. Instead of struggling to keep up with separate repayment dates and amounts, you need to set aside money for a single, fixed monthly instalment. Besides, a fixed repayment schedule will help you withstand the impact of any financial fluctuations. 
  • Avail of lower interest rates: If you’re worked on improving your credit score, you’re likely to find debt consolidation loans with lower interest rates than all of your outstanding loans combined. Debt consolidation loans usually have lower interest rates than the average credit card. 
  • Improve your credit score: While an initial hard credit check may briefly affect your credit score, debt consolidation loans may help improve it over time. Timely repayments account for 35% of your credit score. So, paying the instalments sincerely can significantly improve your credit score. Moreover, if you have outstanding credit card debt and the credit account is open, a low credit utilization ratio may improve your credit history.

Tips for finding debt consolidation loans online

  • Evaluate your income and expenses to assess your affordability. 
  • Work on improving your credit score before applying for a loan. 
  • Avoid making too many loan applications in a short span. 
  • Shop around for loan offers to find the most applicable term at the lowest interest rates. 
  • Work up a repayment plan in advance and adhere to it. 
  • Develop a contingency plan to deal with economic and financial fluctuations. 

Conclusion

Debt consolidation can be a smart way to deal with multiple debts if used wisely. Assess your affordability before borrowing money. Remember, a debt consolidation loan is beneficial only if you repay the funds fully and on time. Failure to keep up with repayments can gravely impact your credit score. 

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