Ease Your Financial Burden Using Debt Consolidation Strategies

If you are weighed down by substantial debt, staying on top of the repayment game can feel faunting, especially if your debt is a combination of loans and credit card usages. Juggling multiple debts with different interest rates and following repayment schedules to the tee can often become overwhelming. 

There is, however, a straightforward solution of ‘Debt Consolidation’ that can help ease the overbearing weight of your debt. In this article, we'll explore what debt consolidation is, how it works, things to keep in mind, and more.

What is Debt Consolidation?

The goal of the debt consolidation method is twofold – condensing your multiple debts into a new loan with one monthly instalment payment and making the repayment less expensive by reducing cumulative interest made over the life of the debt. 

Simply put, it will consolidate your debt into a single, manageable payment, saving your money on interest, reducing your monthly payments, and helping you pay off your debts. Keep in mind that while this method does not erase your debt, it can help you pay back what you owe more efficiently.

How Debt Consolidation Works?

Debt consolidation is helpful if you have multiple debts with different repayment schedules and interest/profit rates. Let's understand this with an example – 

Mr Abdullah has two credit cards with outstanding balances of AED 10,000 and AED 12,000. Each card has a different rate, say, 15% and 18%. In addition, he also has a personal loan of AED 30,000 with a profit rate of 12%.

Mr Abdullah consolidates his debts into a single loan with a more affordable interest rate. He applies for debt consolidation from a particular bank, which offers him a debt consolidation loan of AED 70,000 with an interest rate of 11%. He uses the loan amount to settle the credit card balances and outstanding personal loan amount. 

Instead of making multiple payments, Mr Abdullah has to make one payment to the bank for the debt consolidation loan. Here, the total interest paid over the loan tenure is less than the total interest he would have paid if he had continued to make payments on his credit cards and personal loan separately. In addition, now, with a fixed repayment period and interest rate, he can budget and plan for the future wisely.

Types of Debt Consolidation in UAE

In the UAE, you can use any of the following methods for consolidating your debt –

  • Credit Card Balance Transfer: With this, you can transfer the outstanding balance on one credit card to another with a lower interest rate offered by any other financial institution. This can help you save money on interest charges and pay off your debt faster. 
  • Debt Consolidation Loan: A debt consolidation loan allows you to combine high-interest debts like credit card debts, personal loans, and other unsecured debts, into a single loan with a lower interest rate. 

Instead of juggling multiple payments and due dates, you can make a single payment each month to your debt consolidation loan provider. The purpose of this loan is to simplify your finances, avoid charges related to late payments and others, and even lower your monthly instalment if possible.

  • Home Equity Loan: With an equity home loan, you can borrow a lump sum of money at a fixed interest rate which is secured by your home's value. This means that if you are unable to make repayments on time, the lender may foreclose on your home to recover their funds. 

How to Decide if Debt Consolidation is Right for You?

While the decision to choose a debt consolidation strategy depends on your specific situation, we have curated a few factors that can simplify the process for you – 

  • If you have multiple debts with high-interest rates, debt consolidation can be an excellent option to save money on interest charges.
  • Applying for a debt consolidation loan is advisable only if you have a good credit score. Individuals with low credit scores generally do not qualify for a debt consolidation loan or get it at high interest, which negates the purpose of the loan.
  • If you have an unstable income or multiple additional expenses, debt consolidation may not be the best option.
  • Make sure to consider whether debt consolidation aligns with your overall financial goals. If your motive is to become debt-free, debt consolidation can be apt for you. However, other strategies might be more effective if your purpose is to build up your savings or increase your credit score.

Pros and Cons of Debt Consolidation

Let's take a look at the advantages and disadvantages of debt consolidation for a better understanding of the concept - 

Pros of Debt Consolidation

  • Among the primary advantages of debt consolidation is its lower interest rate, which can help you reduce the overall interest/profit on your debts.
  • It streamlines your payments by consolidating your debts into a single loan.
  • Debt consolidation does not adversely impact your credit score.
  • It is one of the best methods if you want to repay your debts faster.

Cons of Debt Consolidation

  • Debt consolidation may come with additional fees like balance transfer fees, loan origination fees, closing costs, and more.
  • If your credit score is low, you may be stuck with a high interest or profit rate along with unfavourable terms & conditions on your new loan.
  • A debt consolidation loan may give you the impression of having more funds available than you actually have. This way, you may end up accumulating new outstanding balances once again.

Another thing to note is that while debt consolidation can streamline the payment process, you must also target the root causes of the financial behaviours that led to those debts. Thus, you must work on your financial practices before opting for debt consolidation.

Debt consolidation is an excellent strategy to streamline payments and lower your interest rates if you struggle with multiple debts. However, it is important to assess the pros and cons of debt consolidation and your financial habits and learn how it works before going with this approach. 

Multiple methods are available to consolidate your debts like debt consolidation loans, balance transfer credit cards, and home equity loans to manage your finances wisely. You can choose any of these debt consolidation strategies that best fit your financial goals.

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