Debt consolidation involves a borrower taking a new loan to pay other debts and liabilities. In debt consolidation, various debts are joined into one big loan. The new single loan typically has better and favourable terms of payoff, including lower monthly payments and lower interest rates. Debts consolidation has been utilised to deal with credit card debts and student loan debt, among other liabilities.
How Debt consolidation works
In debt consolidation, an individual who is burdened by various debts applies for a loan that will consolidate the debts into a sole liability and pay the debts off. A new debt is thus used to make the payments. Mostly debt consolidation is applied through credit card companies, banks or credit unions. When a person has good debt payments history with their institution, chances of getting a debt consolidation loan increases, on the other hand, if you don’t have a good payment history, lenders can turn you down. To ensure favourable terms always ensure that the bank or institution you get your debt consolidation loan from is reputable. You can visit UKCollectedReviews and look at reviews about credit companies before selecting an appropriate lender
Comparing debt consolidation with debt settlement
It is important to recognise that debt consolidation usually does not wipe out the original debt. Instead it only serves to transfer the loan that a consumer has to a different type of loan or a different lender. For persons who aren’t eligible for Loans or seek real debt relief, it would be better to look into debt settlement rather than going for a debt consolidation loan. With debt settlement, the aim is not to decrease the number of creditors; instead, it aims to reduce a consumer’s obligations. Typically consumers pursuing debt settlement can turn to credit counselling services or debt-relief organisations. These organisations try renegotiating the deal that a borrower has with creditors.
Debt consolidations loan types
Debt consolidation loans fall into two major categories; secured and unsecured loans. Secured loans are backed by an asset such as a car or a house from the borrower. If one defaults on the loan, the asset is used as collateral. On the other hand, unsecured loans are difficult to obtain as there aren’t backed by assets. Lower qualifying amounts and high-interest rates also characterise them. A major advantage of unsecured loans is the fact that no property is at risk. For both secured and unsecured loans, interest rates are usually lower than those charged on credit cards. Specific Interest rates, however, vary from one institution to another.
Advantages of Debt consolidation
One can have a simplified tracking
When one previously paid off multiple loans and is now only left with one loan, this lessens the number of conditions, owing balances and repayments to keep track of. When one has lots of details to track, their ability to plan and budget may be adversely affected. However, with debt consolidation, this unnecessary stress is reduced.
With debt consolidation, one can eliminate multiple account charges. By having only one repayment to make, it is more likely to remember the terms and period of payments, thus evading late payment fees. While consolidating, you can negotiate terms and be entitled to lower interest rate. It is also possible to prolong the loan term. For Example, rather than repaying a loan in half a year, you can repay it in 18 months. This will lower the amount of monthly payments needed.
Offers better credit ratings
Through debt consolidation, one can improve their credit score. This is especially important to those who constantly make insufficient or late payments on their account. Reducing your debts into one makes it easy to remember, and thus you will make timely payments and improve your credit score.
Debts can be incredibly overwhelming. When one has debts that they cannot pay, this can significantly adverse effects on their emotional wellbeing. By consolidating all an individual’s debt into one account, one can take control of their debts. This relieves stress and has overall positive effects on one’s mental health.
In conclusion, while debt consolidation offers quite a range of advantages, it is important to note that there is no single debt consolidation approach that perfectly fits everyone. Instead, the best way to manage debt is for a person to consider their actual financial ability, live within their means and pay debts on time. Also, while taking loans, it is always prudent to go for loans with lower interest rates and friendly repayment terms.