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January 26, 2020
Finance

How Does Debt Consolidation Work

 

The process of accumulating multiple debts and combining them into a single loan is referred to as debt consolidation. Essentially, a person obtains a new loan to pay out several smaller loans, debts or bills. This effectively brings all the existing debts together into a single loan with a monthly payment. 

In actuality, it is technically impossible to combine multiple loans and merge them as each loan has its interest rate along with its repayment terms. Each one is a contract wherein you borrow money and then agree to pay it back over some time with set payments. To combine or consolidate debts, you need to get a new large loan and then use that money to pay off existing loans. Debt consolidation loans can be used to consolidate smaller loans, bills or credit card balances. 

How debt consolidation works

Primarily, there are two ways to consolidate debt- both of which concentrate your debt payments into a single monthly bill:

1. 0% interest, balance-transfer credit card

This works by transferring all debts onto a single card and paying the balance in full/part within the due date

2. Debt consolidation loan

This works by using the money from the loan to pay off the debt and then pay back the loan in installments over a set term.

There are certainly other ways to consolidate debt like taking out a home equity loan or a 401(k) loan. These options, however, pose a risk to both your home and your retirement. In any case, the option that is best for you depends on your overall profile and credit score along with your debt to income ratio. 

Reasons for opting for debt consolidation in Manchester

Debt consolidation loans can be obtained from banks, credit unions or finance companies. People who face trouble paying debts that effectively consolidate debt payments into a single one can opt for debt repayment programs. Following are the reasons for which people opt for debt consolidation:

1. Reduces Interest Rate

Debt consolidation in Manchester reduces the interest rate by paying off high-interest debt with a lower interest debt consolidation loan. This, however, applies only if you can get approved for a lower interest consolidation loan. 

2. Simplifies Finances

Rather than keeping track of several debt payments that need to be made at the end of the month, a single one simplifies one’s finances. 

3. Helps clear debts faster

If you obtain a lower interest rate, keeping the current monthly debt constant, it is possible to pay off debt faster. This allows more of your monthly payment to pay down your debt, i.e. the principal as less money is being spent on interest. 

Whether debt consolidation in Manchester is right for you or not depends on many factors such as your credit score, financial goals and whether you adhere to a budget. Nextgen Mortgage is your point of contact if you need help with any debt consolidation woes. With access to multiple lenders, pre-approval, great interest rates, and no hidden charges, the brand promises 100% security. Visit the website today and we’ll guide you from start to finish.

 

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