Multiple debts can derail your finances, causing a money crisis. As a result, you may find it difficult to pay obligations. Multiple repayments of varied credit types may create a debt trap. Hence, you should work on an effective plan on time.
Unsecured debt consolidation is a popular way
An unsecured debt consolidation loan is usually considered the most appropriate solution. This one financial product can change all your finances for good. But before you apply for it, there is much more to know about this loan solution.
Why do you need consolidation?
Due to multiple loans and credit accounts, you need to merge debts. To be precise, the following are the reasons to apply for debt consolidation.
- Multiple monthly payments
- Higher rate of interest
- Varied lenders and repayment plans
- Growing financial stress
- Increased risk of missed payments
What is unsecured debt consolidation?
An unsecured debt consolidation loan is a collateral-free borrowing solution. This loan merges multiple loans into one loan. As a result, you will pay one instalment on only one loan. No stress of managing multiple loans at varied interest rates. In fact, after consolidating obligations, you pay one debt at a lower rate.
How does unsecured consolidation work?
The process is simple and includes only a few steps. Read below and follow them precisely if you plan to apply.
- Assessment of existing debts – Assess all your debts. Calculate the total amount pending, including all the loans, and also the rate of interest. This gives you an idea of the loan amount you need to apply for.
- Apply for a debt consolidation loan – Now that you know the loan amount required, choose a lender and apply for a consolidation loan.
- Get approved – Receive approval decision. Based on a regular income, you can get approved for a loan amount as per your repayment ability.
- Fund disbursal – After approval, the lender will disburse funds. Use the money for the decided purpose. Pay for all the loans merged into one loan.
- Pay in a single monthly payment – Now, you have only one repayment to make that will be affordable.
What are the advantages of an unsecured debt consolidation loan?
For various benefits, you can consider the fusion of all debts into one and lighten your financial burden.
- Simplify repayments – Yes, the first change that shows is on your loan repayments. In place of many instalments, now pay only one instalment.
- Easy money management – When debts are under control, managing money gets easier. Hence, monthly budgeting gets easier due to a lower debt-to-income ratio. Now, a smaller part of the earnings is used to pay the loan repayments.
- Fixed monthly payments – Earlier, you paid many loans, and some of them had variable interest rates. But debt consolidation comes with a fixed rate of interest. This makes repayment budgeting easier.
- Enjoy a lower rate of interest – One of the primary purposes of debt consolidation is to enjoy a lower rate of interest. This means the instalment size will be smaller. It is a double benefit of reduced debts and interest rates.
- Reduced financial stress – When you have less to pay for debts, it is obvious to feel stress-free. With one loan to pay, you can manage all your expenses efficiently.
- Improved cash flow – Fewer obligations and more spare money to be used for your purposes. Save and invest the funds or spend on purchasing things of your choice. In short, enjoy the freedom to use your income for any purpose.
Beneficiaries of unsecured debt consolidation
If you belong to any of the following financial circumstances, integration of debts without collateral is for you.
- Multiple unsecured debts
- Higher rate of interest
- Managing multiple repayments is complicated
- Fear of losing assets in a secured consolidation loan
- Need predictable instalments
How to borrow responsibly?
Here are some tips to borrow responsibly, as per your affordability.
Consider the following factors before applying to a lender –
- Monthly expenses and income.
- Current credit purchase power.
- Income and employment stability
- Avoid taking a new loan until the funds are paid off
Unsecured debt consolidation Vs Other debt solutions
Debt consolidation is useful only for those with specific financial circumstances, as mentioned above. Hence, know about other debt solutions to see which solution is more suitable as per your financial circumstances.
Unsecured debt consolidation | Secured loans |
Unsecured loans to merge debts have a higher rate compared to the secured ones. But this gives a structured repayment plan, leaving your asset risk-free. | Secured consolidation offers a lower rate of interest, and you can borrow a larger amount. But this puts your asset at risk. In case of default, the lender can repossess your asset. |
Unsecured debt consolidation | Debt management plans |
This pays off the debts securely and completely with the least effect on the credit score. However, the rate of interest is lower, and the loan term is longer. | This is about negotiating with creditors to reduce repayments and the interest rate. But this can affect the credit score negatively. |
Short and long-term impact of consolidation on credit score
Planning finances in the future gets easier if you know the effects of debt consolidation.
Short-term impact | Long-term impact |
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What are the pitfalls of unsecured debt consolidation?
Before you apply, read the following mistakes that borrowers usually make while applying.
- Continuous use of credit cards despite consolidating debts.
- Choosing a repayment plan that is not affordable as per your income.
- Taking a new loan with a larger amount despite loan consolidation.
- Not considering the total cost of repayments.
Tips to create a sustainable debt-free plan
Once you are free from debts after consolidating them, it is vital to work on a plan to stay debt-free.
- Create a monthly budget and stick to it.
- Create an emergency fund and keep adding funds.
- Prioritise essential expenses.
- Seek financial advice if required.
- Monitor your financial progress regularly.
How to know that debt consolidation is a good choice for you?
With the following indications, you can know if debt consolidation is the right choice or not.
Debt consolidation is useful if you want to –
- Control finances and obligations.
- Predictably, repayments are needed to manage expenses.
- Have a clear ending date for loans.
- Be free from pressure of multiple repayments.
Conclusion
You can now understand why consolidating debts is a good idea. Apply safe and follow all the formalities and avoid pitfalls. Also, after comparison with other debt solutions, you can decide better about the significance of merging debts.
For some specific circumstances, you may need to rethink whether consolidation is better or some other solution. For example, if you have taken very bad credit loans from direct lenders, choose debt management in place of consolidating debts.
If not this, choose secured consolidation as with a very poor credit score, getting approved for an unsecured loan can be complicated. Be sure to apply to the right loan solution with the accurate financial details and say goodbye to obligations.
Tags : Unsecured Consolidation
