People sometimes unwittingly fall into the debt trap that they find difficult to climb out of. Fortunately, a debt consolidation loan is a way to pay off multiple debts.
What is debt consolidation?
This type of loan consolidates all high-interest loans into one so that the consumer only pays one loan. The multiple debts, usually high-interest loans such as credit card debts and student loans, are merged into one loan with better terms. This loan type usually demands a lower interest rate or lower monthly payment. Sometimes this loan type has both low interest and monthly payment.
How does it work?
Banks, credit card companies or credit unions commonly offer this type of loan. First, the consumer applies to consolidate all their other debts into a single loan. Then they pay a single entity until the loan is fully paid.
Debt consolidation is more favourable for creditors because it increases the chances of collecting from debtors. However, it is important to note that a good credit score plays a role in getting a lower interest rate when taking out this type of loan.
What is its difference with debt settlement?
Debt consolidation does not mean that the debtors’ debts are erased. It is just a transfer from different lenders to one single lender. It is an option for those who can pay for the loan but are just looking for alternatives to lower their interest rates or increase their payment terms.
However, those having difficulties paying their loans should look into debt settlement. It helps reduce consumers’ obligations instead of the number of their creditors. To do this, consumers can contact debt-relief organizations. They can also undergo credit counselling services.
What are the different loan consolidation types?
Secured and unsecured loans are the two class of consolidation loans. Secured loans are those that come with collateral like a house or car.
Unsecured loans do not need collateral. However, it is more difficult to apply for this type of loan. The interest rate is also higher, but the loanable amount is lower.
The advantage of these is that their interest rates are still lower than those on credit cards.
What are the requirements to avail of this loan?
The primary qualifications needed are creditworthiness and the capacity to pay. When applying for this loan, you may be asked to provide your credit history, employment certificate, monthly statements of your credit cards, and letters from the creditors.
Not all lenders are the same. Some lenders decide which debt will get paid first, while others may let you choose which one you want to pay first. If you are given a choice, it would be advisable to pay the debt with the highest interest first. Another consideration would be paying the debt that is causing you strain in your relationships.
Getting buried under debt can be stressful. However, you can get out of it through careful planning and wise spending and with the help of a trustworthy lending institution. Applying for a debt consolidation loan is one way to get out of debt.
Financial planning helps to avoid getting back into debt. Remember that a person with no obligation sleeps better at night.