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The advantages and disadvantages of Free Consolidation Services

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The advantages and disadvantages of Free Consolidation Services

Many times the debts of the credit cards are about to go out of control and it is necessary to take action to avoid becoming over-indebted. A common repayment strategy is the consolidation of debts.

Through debt consolidation services, you get a loan to settle your credit card accounts and you are responsible for paying a single loan.

This strategy is not ideal for everyone, so you should inform yourself about the advantages and disadvantages it offers you to make the best decision.

What are debt consolidation services?

A typical debt consolidation services offered by a credit counselling agency is called a debt management plan. The team has experience in debt management and consumer credit counselling. Knowing this, you can receive a balanced evaluation and know if it is really the best program to help you achieve your financial goals.

Let us find the advantages and disadvantages of using Free Consolidation Services:

The advantages:

•    Combine several payments in one: It allows you to organize yourself and the convenience of making a single monthly payment.

•    Earn lower interest: If you have good credit, most of the options to consolidate your debt, either a personal loan or a line of credit on your home, offer you lower interest rates than those of credit cards.

•    Reduce monthly payments: If the interest on your new loan is lower, it is very possible that your monthly payment is also lower. Also, if you pay on time and consistently, you would avoid any fees for late payments and for exceeding the credit limit.

•    Pay 100% to your creditors: You would liquidate your creditors and preserve a positive payment history if the accounts have been in good standing with your creditor.

The disadvantages:

•    It may cost more in the long run: In spite of obtaining interest and reduced payments, if the repayment period is extensive, at the end of the life of the loan you may end up paying more.

In addition, depending on the consolidation method you use, your total debt may increase with the addition of charges associated with the loan or fees for transferring balances from one card to the other.

•    You can borrow more: Either by necessity or by will, if you reuse the cards you already paid, you would face paying the original debt plus any new debt.

•    It may be more expensive: If you consolidate your cards with a secured loan, such as a line of credit on your home, failing your payments puts you at risk of losing your home or any other valuable possession you have used to secure your loan. You should avoid putting at risk things whose total value is greater than that of your credit cards.

•    Negative effects on your credit: Consolidating debts can affect your credit score by changing the use of your credit. You do not eliminate the debt, but combine it and affect the balance of debt and available credit. If you close your paid credit cards, you also suffer your score.


When is debt consolidation needed?

Posted by freedebtsadmin on
When is debt consolidation needed?

Debt consolidation is the unification of all the credits held by an individual, even if they correspond to different entities. The procedure consists of obtaining new financing to cancel each one of the outstanding loans.

By consolidating their credits, the person commits to a single fee less than the sum of all the payments made per month. This may occur as a result of a lower interest rate or the extension of the financing term.

To explain it in another way, when the bank offers debt consolidation, it is proposing to buy the loans that the debtor owns with other institutions. Thus, a new client wins, providing better credit conditions.

When is debt consolidation needed?

In the following scenario, you will need debt consolidation.

•    When your debt excluding mortgage does not exceed 40% of the total gross income.

•    When the cash flow steadily covering payments towards the debt.

•    When you plan to prevent debt again in the future.

•    When your credit is acceptable for low-interest debt consolidation loan or credit card.

Example of debt consolidation:

Let’s look at an example of debt consolidation. Suppose that a person has credit for the US $ 15,000 in bank “A” at 12 installments and with an interest rate of 3% per month.

At the same time, he has a loan with bank “B” of US $ 20,000 to 14 installments and with an interest rate of 3.5% per month.

In both cases, we will assume that all quotas are equal. Thus, we will use the following formula:

Then, the fee is the US $ 1,506.93 with bank “A” and the US $ 1,831.41 with bank “B”. That is a total periodic disbursement of US $ 3,338.35.

Let’s suppose that you need to pay 50% of both loans. Suddenly Bank “C” offers the consolidation of the debt with new financing for the US $ 17,500. This amount will be used to cancel the outstanding loans.

If Bank “C” sets a monthly interest rate of 2.5% for the new loan and 7 payments, all equal, the fee will be the US $ 2,756.17.

Finally, although we do not consider it in the previous example, it should be noted that the early cancellation of a loan may require payment of a penalty.

Advantages of debt consolidation:

There are several advantages of debt consolidation. First, it is useful in the face of short-term liquidity problems.

For example, suppose a person loses their job unexpectedly and can no longer meet all of their financial obligations each month. So, debt consolidation is an alternative to reduce expenses.

Also, unify the loans allows maintaining a greater order. Instead of having several installments with different maturity dates, there will now be a single disbursement that can be programmed strategically.

Disadvantages of debt consolidation:

A possible disadvantage of debt consolidation is the increase in total expenses. This will depend on the term of indebtedness, which may have been extended and the type of interest that the bank sets for the new loan.

Therefore, it is important to calculate the total disbursements until the end of the financing period.

In addition, we must take into account that it will not do anything for the borrower to consolidate his debts if he reacquires other credits. This would only generate financial problems.

Debt consolidation is explained here in more detail.

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