Debt consolidation: the basics

Debt is no fun. It puts you under tremendous pressure. The cause of debt may be an individual’s  careless spending habits or unexpected expenditures such as accidents. You may decide to take up one loan after another in an attempt to solve your financial problems and that unfortunately suck you into a debt trap. So how do you get out of it?

Debt consolidation is one of the most suitable ways to get out of multiple debts. It is a form of debt refinancing that lets you take up one loan to pay up all the other loans that you may have, then repay it slowly. Basically, it requires you to calculate the total amount of money you owe all your debtors, including the interests of the debts, then taking one loan that services and clears all of them, then leaves you to just deal with one loan repayment instead of the numerous that you may have had initially.

Debt consolidation loans is one good way to help you clear multiple debts and give you a little breathing space. It could be a lifeline and save your from the following problems.

1. High interest rates

 

Debt consolidation, saves from high interest rates

Debt consolidation, saves from high interest rates

With debt consolidation, you save yourself from paying high interest rates. For example, you have a few debts with high interest rates. You are forced to pay a substantial amount in interest every month. Taking up a debt consolidation plan means that you combine those debts with high interest rates into one consolidation loan with a new rate that is lower. This means you can actually manage to slowly clear the debt consolidation loan. The lower interest rate of the consolidation loan helps you save a tremendous amount of money every month.

2. Late payment charges

 

When you have a lot of debts to service, you are prone to making late payments or could not afford to repay at all. You could find yourself getting penalized for not paying on time. Moreover, the debtors may also review your interest rate and increase them. With a debt consolidation plan, you can avoid such financially catastrophic outcomes and keep your head above water.

3. Bills confusion

 

Less bill confusion

Less bill confusion

With debt consolidation loan you have less to worry about. As you have combine several debts into one consolidation loan, you only need to worry about paying up just one loan instead of having to keep track of the numerous loans you used to have. 

Debt consolidations have become very popular these days. It comes in different forms for you to choose from. The different types of debt consolidation are:

  •         Debt consolidation company
  •         Home equity loan
  •         Balance transfer option
  •         Peer-to-peer loans

Debt consolidation company

 

This option is the most common of them all. You will approach the consolidation company, either in person or online. You apply for the consolidation loan. After some simple checks, the debt consolidation company approves the loan and you start repaying the consolidation loan slowly.

However, you have to be careful with this option too. Look at the amount of money you normally pay for your various debts, then compare to what you would pay after taking up the consolidation loan. The latter amount should always be lesser so you can save money with the consolidation loan. Then look at the time frame the consolidation loan gives you, then calculate the amount of money you would pay in the end. You may realize that you are paying more than you actually should. It’s all about balancing the numbers to make things favorable for yourself. Some companies offer debt consolidation loans with bad credit.

Interest rates could also be predetermined by your credit score. People with a fair or bad credit score have to endure higher interest rates.

Home equity loan

 

Home equity loan

Home equity loan

Home equity loans are basically some of the best debt consolidation loans that allow you to repay your debts using your house as collateral. This plan lets you get about 70-80% of the value of your home. The best part is, the interest rates of home equity loans are quite low. This means that the loan is quite affordable and attractive. However, there is a twist. A home equity loan is a secured loan, meaning that if you are unable to repay back the loan, your house may be taken by the lender.

The loan is a good option only if you are sure you are able to pay up the loan eventually. If you are unsure, then this plan is just like playing Russian Roulette with your house. The attractive aspect of this loan is its low interest loans. However, you have to manage the risk of losing your house too.

Balance transfer

 

charge 0% interest up to a certain point

charge 0% interest up to a certain point

0% interest loans are all over the media nowadays. They charge 0% interest up to a certain point. Balance transfer is a kind of plan that gives you the ability to pay back the loan with 0% interest up to a certain period of time, between 6 months and a year. From then, you will have to start paying back the loan with interest. You first pay the initiation fee and about 2-5% of the total cash borrowed and then you get the loan.

During the period with no interest rates, you have to repay monthly on time and in full. Failure to do so will lead to the plan being cancelled and you have to pay normal interest rates. The key to this plan is the portion of the loan you have repaid before the interest rates kick in. The more you pay up before interest rates kick in, the more advantageous it is for you.

Peer-to-peer loans

 

The middleman company links you up with a lender who can give you the loan. The middleman company is paid for their service of getting you a lender. For the lender, he has the opportunity to make a profit out of lending you money. It also gives him the satisfaction of helping a person in need. The loan repayment period for this type of loans could range from a couple of months to about 5 years. It’s all what agreement you have with the lender. Get a debt consolidation loan calculator and get the best loan services you possibly can!