Managing different debts can be an arduous task for even the most capable business owners.
Consolidating them into a single account can save interest and improve your credit score in the long run.
Even successful companies go into debt for a variety of reasons, including playing it safe by risking other people’s money rather than their own. But if your company is to end up with multiple debt accounts, debt consolidation can be the saving grace.
Some startup owners might be wary of debt consolidation as it would mean incurring a higher balance. Here is some advice on when it is useful to consolidate debts and how to achieve the best results with the new credit.
What Is Debt Consolidation?
Debt consolidation is the grouping of some (or all) current debts into a larger debt to be paid off as a whole. For consumers, it is often used as a tool to pay off past-due or long-standing liabilities, such as credit card debts.
The new debt account will have the same total amount to be paid and may have additional fees that come with debt consolidation. So when dealing with a debt consolidation company, always keep in mind how much debt consolidation will cost compared to the individual debts.
How Is Consolidation Useful?
A consolidated loan will only be useful and worthwhile if the interest rate is lower than those of the separate debt accounts. Furthermore, once the lender calculates the new debt, the lower monthly payments may lead to a longer pay-off period and more interest paid over time.
But if you manage to negotiate favourable terms, the new debt can be paid off quicker and cheaper than all the previous debts combined. This is why debt consolidation exists and many people and companies take advantage of it.
How Does Debt Consolidation Affect Credit?
When applying for debt consolidation, the credit inquiry will slightly lower the credit score. The credit score goes down further when the debt takes effect, as businesses receive score penalties for the total number of debts owed.
Once new payments start going out, however, the credit score will improve over time. Furthermore, since there is only one debt to pay compared to several smaller ones, credit utilisation is higher and this can have a significant impact on the score.
With multiple debts, there’s also a chance of missing a payment and accruing more fees and penalties along the way.
By contrast, a consolidated debt only requires a single payment, greatly simplifying the process and reducing the chances of missed payments, which may give the business owner more peace of mind and free time.
Things to Keep in Mind
People often won’t change their spending habits or credit even with a consolidated debt. So if the debtor doesn’t remove the symptoms of irresponsible credit usage, the new debt will only work against them.
If the combined debt makes sense to you, good budgeting habits will help you pay it off faster and prevent incurring future debts that don’t serve you or your company.