Millions of people all over the world are struggling with debt and the recent financial crisis has only made the problem worse. The US debt now tops $15 trillion and the UK as a nation also owes approximately Â£1 trillion. In short, we owe more money than ever and many people simply cannot afford to pay it back.
People are paying minimum payments on high-interest credit cards and loans just to survive and they are barely making a dent in their debts. If anything, their debts continue to grow as more interest is added on.
For people in this situation, debt consolidation can be a viable option. Hereâ€™s how consolidating your debts can help save you money and improve your credit rating:
- Reduced monthly payments. By combing all of your debts into one monthly payment, you can often spread it out over a slightly longer term to make the payments more manageable. This also allows you a bit of breathing room in case you have any unexpected expenses like a car breakdown.
- Improved credit rating. By choosing an amount that fits within your budget and manageable as a long term payment, you actually improve your credit rating. This works because by paying back your debt without taking out more, you show that you are a good borrower and this is reflected in your credit file.
- Reduced interest rates. Debt consolidation loans can actually save you money â€“ especially when use them to pay off high interest credit cards and smaller loans. The larger the amount you borrow, the lower the interest rate. This means that you end up paying a lot less back than you would if you kept paying minimum payments on your credit cards.
- Simplifies your finances. With multiple debts it can be difficult to manage and make the payments every month. This results in missed payments and can result in defaults, arrears and sometimes court action. By consolidating this into one payment, you make the process easier and are more likely to pay off your debts successfully.
If you have a history of bad credit or have been struggling to keep up with your debts, then you may be offered a secured loan if you have equity in your home. This makes it even more important to reduce the monthly payments to a manageable amount as your home may be at risk if you donâ€™t keep up payments.