Debt management is always a tricky affair for the entrepreneurs of all class. However, what to do if you get caught up with multiple loans and pending payments? If you are struggling with it already, this challenge will soon become an increasingly painful nightmare that can pull your business down.
If you have to deal with the hassle of multiple business loans, payment to creditors, credit card repayments, there is a sure shot solution to restore your business fund flow and get back on track. It is called debt consolidation, and if you can use it correctly at the right time, it can potentially save you from bankruptcy or a full financial collapse.
However, it is not easy to understand all the undercurrents of going for a debt consolidation, especially for a fresher. Moreover, all the debt consolidation avenues are also not equal. Here, we are trying to break down the essential facts about consolidation, who can benefit, and how one can choose the best option.
Definition of debt consolidation
For those who are new to it, debt consolidation is the process of paying off several of your existing loans with a single, bigger loan. By consolidating all the debts, businesses may save themselves from multiple and confusing payment cycles with a single, more consistent monthly payment.
In addition to the convenience it offers by easing the accounting process, consolidation may also ideally allow the borrowers to reduce their costs on interest payments and get an extended period for paying off their debt.
Debt Consolidation vs. Refinancing
Though the two share some similarities, consolidation and refinancing are essentially different.
- Debt consolidation is the process of acquiring a large loan to pay off all the smaller loans together at once.
- Refinancing refers to taking a new loan to pay off a single existing loan. Here, only the lender or loan terms change over a particular loan.
We can conclude it by saying that debt consolidation is a unique form of refinancing, but all refinancing are not typically debt consolidation.
Why you may need debt consolidation?
Most of the businessmen are looking for debt consolidation due to three primary reasons as discussed below. The category you fall into plays vital in deciding whether you actually qualify for the consolidation or need to go after refinancing, and what methods and interest rates will be available in your particular case.
1. Misunderstanding of loan terms
It is a common problem, especially for the beginners. The varying types of loans and interest terms may get confusing, and it is easy to make a mistake and sign up for a deal that ends up being unsuitable. The actual APR of the loan you commit to may be far more than what you have understood.
This way, as we can see in many debt consolidation reviews, the problem compounds with multiple high-interest loans that you are going to avail on the go. When the situation goes out of hand, consolidating all the different loans into one large loan may be a good alternative APR.
2.A one-time jam
If you are a skilled businessperson, it may not be the above cause which ultimately put you into financial trouble. You may know exactly what you were getting into, but sometimes you cannot avoid the situation because of dire circumstances.
It may be due to an emergency expense, operational overhead, or an unexpected cash flow issue where you may have needed money fast, irrespective of the terms associated with it.
It may ultimately prove out to be an expensive and unmanageable debt. Once that emergency has passed, you may be looking for more options to shop around and find a refinance or consolidation option to replace the high-interest debt with a more affordable one.
3.Overburdened by with multiple debt sources
It is the most common case with the borrowers as they find themselves completely trapped with 5, 10, or more small loans with exorbitant interest rates, which make their entire accounting process and payment cycles confusing.
Unfortunately, it may be a tragic situation as such borrowers may typically have low credit scores, and their businesses may also be suffering from poor cash flows, making it difficult for them to mange the situation.
How to identify if debt consolidation is ideal for you?
If you find yourself caught in one of the above three scenarios, you can probably think of debt consolidation as a way out. Here are a few more reasons for you to go for consolidation.
- Multiple loan products are pending for you
- You are troubled with high-interest loans and want to have a low-interest alternative
- You have a few short term loans that you are not confident about paying off and want to extend the repayment period
- You have a high credit score and want a better interest rate
- Consolidation makes sense to your particular type of business based on its nature and fund flow cycles
Making a smart decision
It is essential to go about debt consolidation the smart way to enjoy the fullest benefit of it. As a businessperson, it is critical for you to do your own homework to choose an ideal consolidation product which will work the best for you on a long-term basis. Here are some tips for it.
Identify your existing debts
Calculate the total amount you owe and the interest rate. Talk to your lenders and understand the terms and conditions if you are planning to pay off all these debts as a lump sum.
Know prepayment penalties
Many lenders with whom you have signed loan agreements may have explicitly mentioned the early payment penalties. Sometimes, these fees may be so hefty that they make the entire debt consolidation benefits go in vain. So check these terms and feel free to negotiate with the lenders who may be waiving prepayment penalties.
Determine what you want to consolidate
It is not mandatory that you have to consolidate all the different loans at once. Instead, you need to figure out which loans are putting the most burden on you, and which ones are being difficult to pay off. It is the troublesome loans that you want to consolidate first.
Once you have a clear-cut understanding of your exiting situation, it becomes easier for you to calculate your current APR and compare it with the possible APR. Shop around for various options, study the terms and conditions of different lenders, and compare them to pick the best deal.