Debt consolidation is the best way to combine all of your debts taken so far into a single monthly payment. This process can be done with a ‘debt consolidation loan’.
How it works?
Debt consolidation loan helps you pay off your debts that you have taken so far. All your debts are combined into a single, larger piece of debt. This usually happens with better ‘terms and conditions’ so that there is no burden on your shoulders. What are those favorable payoff terms?
- a lower interest rate,
- lower monthly payment
- or both.
People can use the debt consolidation tool to pay off the student loan debt, credit card debt and other types of debt as well. There are many ways by which consumers can change their debts into a single monthly payment. One of them is by consolidating all the credit card payments into a single new credit card. This shall be a great idea. The card will charge very little to no rate of interest for a time period. Home equity lines of credit or home equity loans are other forms of combinations highly sought by some people. Interestingly, the rate of interest on this type of loan is verifiable for taxpayers who keep a detailed record of their deductions. Also, there are many reinforcing options given by the government to people who have taken student loans.
There is no doubt that debt consolidation is one of the best forms of financing to pay off other debts. However, there are some specific instruments in the debt consolidation loan which are given by creditors to the borrowers, as a part of the payment plan, who are facing challenges in managing the size of their debts all at once. There are several reasons why creditors are willing to do this. It maximizes the likelihood of collecting from a debtor. Usually, these loans are offered to the borrower by financial institutions such as credit unions, banks. Also, there are specialized debt-consolidation service companies that help people to overcome the vicious circle of debt.
Debt consolidation loans are of two types:
Secured loans are supported by the assets of the borrower such as a car or a house. This works as collateral for the loan. The traditional, unsecured debt consolidation loans, generally, are not supported by the assets of the borrower, which is why it is difficult to get. Unsecured loans also tend to have a high rate of interest and lower qualifying chances. While the borrowers of a secured loan avail benefit. They have lower interest rates when compared to the credit cards and traditional loans as well. Also, the rates are fixed, there are no chances of price negotiation.
Once you are able to get your debt-consolidation, the first question that hits your mind is-which bill to tackle first? The lender is likely to give the borrower some suggestions. But it is advised that you should try to pay off your highest-interest debt first. As soon as you pay your first debt, move to the next debt in a waterfall payment, and keep going until all your bills are paid.