Debt Consolidation
What is Debt Consolidation?
Debt consolidation or loan consolidation helps you to combine all your debts into one single loan. In this process you take a secured or an unsecured loan to pay off existing debts. top
Apply for another loan? I’m already in serious debt! I’ll go bankrupt!
Quite the opposite. While you consolidate all your debts, you get a lower interest rate. This makes it easier for you to pay off your debts faster. The idea is to secure a lower and fixed interest per month. top
How does debt consolidation work?
A debt consolidation loan is a secured loan in most cases. You also have the option to get an unsecured debt consolidation loan. But, in case of an unsecured loan, the rate of interest will be much higher than a secured one.
A secured debt consolidation loan will fetch a low interest. The lender will agree to that because you offer something as collateral. The loan will also reduce the interest amount further as you will not have to pay variable interests on the credit card debts, not to mention added fees like late fees or over limit fees. You pay a fixed and a low amount every month to pay off the loan. The best part is that you can extend your repayment term if you require doing so.
An unsecured loan might not get you an interest as low as a secured loan but it would at least be a fixed amount that you pay every month. In all probability the amount would be lower than what you pay your credit card companies every month. Here are 9 common questions and answers on debt consolidation. top
Advantages of debt consolidation:
Some of the basic advantages of debt consolidation loan are:
- Single monthly instalments – It consolidates all your loans into one single loan that you repay on a monthly basis.
- Single loan – You do not need to worry about different loans. Now, you just have one loan to pay off!
- Low monthly interest rate – You get a lower interest rate with this loan.
- Extend the repayment period of your loan – Pay a small and steady amount every month to clear your debt. Low monthly payments!
Disadvantages of debt consolidation
- Collateral-A lot of companies offer secured loans also known as home owner loans for debt consolidation. The company will only lend you the money against some form of collateral, like a house that you own. Thus you are putting your house at stake.
- If you get the loan from a significantly small lender who goes insolvent or hands your loan program along to a less than credible third party you could face legal consequences.
- Although, by extending your repayment scheme you will be able to make smaller monthly payments, you will also end up paying a lot more than what you had loaned for.
- Debt consolidation comes at a price along with hidden costs like service charges. You probably do not have to pay for these out of your pocket because the lender will make more business from you by adding these costs to the amount that would be loaned to you.
Debt consolidation loans may be suitable for borrowers who are juggling with several loans or buried in credit card debts. It may help the borrower to avoid taking up extreme measures like filing for bankruptcy or applying for IVA. It also helps you to maintain a reasonable credit score. But we will always suggest to consult a good financial advisor before you apply for a debt consolidation loan. Do not forget to read 4 myths about debt consolidation.
