Debt consolidation involves requesting a loan to pay off all your current debts and paying a single debt of less interest for a period of time, generally longer. Consolidating means establishing a payment strategy that allows us to reach more baggy at the end of the month and thus eliminate some of our financial problems.
However, debt consolidation has a number of advantages, disadvantages and aspects that we must take into account. What is the risk of unifying payments in another credit? In what state should I see my debts to make this decision? How do I know that I am making the right decision?
Debt Consolidation: Practical Example
To understand what it is to consolidate, we are going to give the example of Laura (fictitious assumption), a woman who after taking a few months in a hurry to reach the end of the month, must make a decision to solve outstanding debts and start having a more relaxed economic situation .
As we see in the following table, Laura has a series of credits that have accumulated in recent years (Credit for the car, credit card, pool etc …)
If we consider that Laura has a salary of $ 2000, her current credits are eaten ¾ parts of her monthly income. Requesting a debt consolidation, a credit would be requested from the bank for $ 87288 and we would negotiate a fee that would be around $ 400 / month (which means a saving of $ 13224 per year)
A credit is nothing more than a tool of our financial system to obtain certain assets or privileges that otherwise would never have been accessible to us. In other words, a credit is the “purchase of money” from an external entity, and there are different ways to deal with that payment. If your situation has changed, nothing happens to change the way you pay your debts.
Consolidate credits: What advantages does it offer us?
To help you make the decision that suits you best, we will start by telling you the advantages that debt consolidation can have to improve our current situation:
All payments in one monthly
It will be easier to organize on a day-to-day basis if we have a monthly payment in our account, so that we do not have to be aware of the different monthly payments that we face.
We will pay the interest of a single amount due, and not the interests of 4 separate credits, so as a general rule, we will pay less interest . Logically, this will depend on the bank with which we manage our debt consolidation action.
We would go from having several credits to having only one and we would have a positive payment history , as long as we had the current payments with our former creditors.
Disadvantages of debt consolidation
All the actions of the financial world are two-sided coins, which you should know to avoid scams and deceptions.
In the words of Warren Buffet, the price is what you pay, the value is what you receive. You should know what the price of debt consolidation is and what will be the value you will receive for this operation.
You can end up paying more money
Paying less interest does not have to be synonymous with paying less money. When we carry out a debt consolidation, the time during which we must be paying increases, so it is important to have a certain forecast of the income that we will have in subsequent years.
This will depend on our personal actions rather than the financial operation. For example, if we pay a credit card but reuse it, we will have the old debt plus a new debt.
It can be very expensive
If, for example, we make a reunification of debts with a mortgage and join all of our outstanding loans with the credit line on our house, we may have a problem with the property if we do not make the corresponding payments.
How to consolidate my debts effectively?
There are also a series of cases in which debt consolidation is not a good option. For example, if you can face all your payments but want to reduce the monthly fee , you should reconsider the idea, since you know what the price of this operation is.
In addition, if you are a messy person in finance or forget to pay on time, it is convenient that you try to be more orderly on a day-to-day basis instead of developing a new financial strategy. In general, seeking comfort only is not the best reason to request debt consolidation , although our comfort increases if we cannot afford payments.
Taking a debt without changing the financial habits that led you to this situation is not the right solution
However, if you have already ordered your finances and need to request a debt consolidation with all the guarantees, it is important that you have specialized help. There are consultancies that will help us achieve the best conditions of the new loan against our usual bank.
In the same way that we request the help of a lawyer in the face of any legal conflict that may arise, it is necessary to have specialized financial assistance such as the one we offer at Pardillo Consultants to achieve the objectives we have and to sanitize our financial health.
In the end, banks are only private companies that will look for their own good and credit agencies know the specialties and weaknesses of each of them to offer you the best solution. At Pardillo Consultants we receive hundreds of requests to consolidate debts and we are used to working with various financial entities.
We process the debt consolidation request
we include in the monthly fee the price of the notary, the agency and all those fees derived from performing said financial action.
So far our post on debt consolidation. We hope that the information has been very useful to you and do not hesitate to share it if you think it will be of help to your nearest circle.