Debt Consolidation – Everything You Need to Know About Consolidating Debts
There are lots of different options to choose from when it comes to coping with debt. One such solution is Debt Consolidation Loans. This article throws light on what these loans are, what they cover, their pros and cons, and who can benefit from these loans. So, if you’re looking to consolidate your debts, keep reading.
What is Debt Consolidation?
Debt consolidation is the act of applying for new loans to pay off outstanding loans and liabilities. To consolidate debts, multiple debts are combined into a single, more significant debt and are paid with a single credit loan. In simple terms, it is acquiring a large debt to pay off combined smaller loans.
There are two types of debt consolidation loans. These are;
Unsecured Debt Consolidation Loans
These are loans that are not back by assets (collateral) and are more difficult to obtain as lenders will be checking your credit history in order to understand whether the borrower will be able to pay it back or not. Unsecured debt consolidation loans tend to have higher interest rates because they are riskier to the creditor. Examples are credit card loans, student loans, personal loans from banks, etc.
Secured Debt Consolidation Loans
These are loans backed up by assets that serve as collateral. For example, when you take out a secured loan, you pledge specific property such as a house or a car as placeholders till payment is complete. Interests on secured loans are lower than unsecured loans. This type of loan is riskier for the borrower as they can lose their assets if they don’t pay the sum back.
How Does Debt Consolidation Work?
Debt consolidation loans are a good option if you have loads of debts to pay to different sources. Here, different debts are made into one “lump sum,” and then a larger loan is obtained to settle these debts. Payments are then made on the new credit loan until the debt is paid in full.
In most cases, people apply for personal loan debt consolidation from their banks or credit card companies as a first step into trying to get out of debt. At Debt Management Professionals, we are proud to offer you a full service that will make this process problem-free and easier than you think. We will get you in contact with the best experts in the market who will be taking care of your debts and breaking down the steps for you in plain English.
Is Debt Consolidation Right For You?
Debt consolidation rolls both high-interest and low-interest debts into a single payment. Therefore, if you have debts from more than three lenders, a consolidation express loan would be of great help.
It would help you track your record of monthly payments. Instead of making several payments to different lenders monthly, you would make payments to just one every month. Therefore, if you find difficulty handling many creditors, loan consolidations are an excellent choice for you, get advice from our experts in debtmanagementprofessionals.net
Debt Consolidation Example
Obtaining a bigger loan to offset a combination of smaller loans is the best way to consolidate debt. The table below shows a typical example of how debt consolidation helped reduce interest rates on payments for debts and even cleared the payment period 5 months earlier.
Take a look at the table below;
|LOAN DETAILS||BEFORE CONSOLIDATION||AFTER CONSOLIDATION|
|Period||28 months||23 months|
|Bills paid per month||3||1|
|Bills with Interest||£5,441.73||£1,820.22|
|Total money Paid||£20,441.73||£16,820.22|
With a £30,000 debt on the card and relatively high expenses in value, Carolyn earns £100,000 a year. Her balance is very close to the boundary and some over the limit. She wants to pay her creditors, but she cannot manage excessive rates and minimum payments. She has a small equity condo in London, and she owned a £30,000 condo on top. She was denied a loan on her property due to low scores of her huge credit card debt, which she did not sell while her property was on the market.
A debt consolidation loan can be Carolyn’s preferred alternative because its interest rates may fall to 6% rather than the 23%, which she currently pays. She will pay a small fee plus a reduced monthly payment which will be delivered to her creditors. If Carolyn is saving 17% interest on her £ 30,000 and her payments are not drawn out for ten years, it could be a good choice in this situation.
What Does Debt Consolidation Cover?
Debt consolidation covers unsecured and secured loans for debt consolidation. However, there are boundaries where lenders and corporations who help with consolidating debts draw the line. The table below will show you what and what not debt consolidation covers.
Take a look at the table below;
|Credit Cards||Boat Loans|
Costs of Debt Consolidation
There is no definite fee to consolidate debts. Its repayment mechanism depends on the institution, or individual the loan is obtained from, the number of debts consolidated, and the overall interest and time agreed to pay. The debt consolidation loan rate also depends on the credit score/background of the person applying for it.
Pros and Cons of Debt Consolidation
The most attractive advantage for unsecured loans is the fact that assets are untouched. To consolidate debt, there are benefits as well as advantages. The table below shows the pros and cons of consolidating debts.
Take a look at the table below;
|Fast implementation (simplify payment process)||The overall increase in debt|
|Monthly payments are reduced to an affordable amount||Debts could be worse if bad spending habits carry on|
|Payments are consolidated to only one||Credit rating could be affected|
|Interest rate could be reduced|
Do you qualify for Debt Consolidation?
Before considering a consolidation loan, one must be sure they are qualified for it. The best way to consolidate debt depends on the situation of the borrower.
In most cases, the eligibility of the borrowers depends on the creditors’ criteria.
Therefore, to qualify for debt consolidation, you need;
- Creditworthiness: Lenders will check payment history and report
- Proof of income: Lenders, would want to make sure you have a steady source of income.
- 18 years old or more
- Equity: For secured loans, lenders would make sure you have valuable assets for collateral to hold and make sure you meet up with agreements.
However, make sure you are aware of all your options so that you can choose the one that benefits you most.
How Do I Consolidate My Debt?
There are various ways people can obtain debt consolidation loans.
Some of these are;
● Credit Card Balance Transfer:
Transfers by credit card balance are another form of debt consolidation. This is where all your credit cards migrate the debts to a new one. However, this strategy is generally accompanied by transfers of all obligations into one credit card. It can cause a significant increase in the New Card interest rate if you pay late.
● Home Equity Line of Credit (HELOC):
Some people use a home equity credit line as a kind of debt consolidation (aka HELOC). This secured loan allows you to buy cash on your home’s current value using the equities you have collected as security.
Equity is the difference between what you owe and the market worth of the residence. With a HELOC, you basically abandon and trade part of your property to pay off your other loans for more outstanding debt.
What Are The Alternatives to Debt Consolidation?
Here are 5 best debt consolidation alternatives:
- Pursue debt settlement
- Use the debt snowball method
- Sign-up for a credit counselling program
- Opt for a debt management plan (DMP)
- Declare bankruptcy
What Is A Debt Snowball?
This is one of the strategies for becoming debt-free. A debt snowball method involves arranging debt in the hierarchy of smallest to biggest and paying off smaller debts before focusing on big ones.
What Is A Second Mortgage?
This is when another mortgage is taken when the first mortgage is still in effect.
What Is A Debt Management Plan?
A DMP consolidates all the unsecured loans into one monthly payment and takes care of all of your creditors being paid until it is then closed or inactivated. While on the program, it may be difficult to apply for other credits.
Due to the debt management plan, many creditors are ready to offer perks to help you with the payment of the bill and get back on track because you may repay your unsecured debt without taking on any more debt. Such advantages could include preventing late charges or excess charges, decreasing, or eliminating excessive interest rates and ceasing collection calls or legal actions.
Debt management plans usually run between three to five years and can help you restore a consistent history of payments.
What Is A Home Equity Loan?
Other ways people pay off their unsecured debt is refinancing, taking second loans (mortgage) and credit equality lines. A house can be used as a guaranteed loan to pay an unsecured debt (e.g. credit card). The loan repayment can entail cheaper payment amounts than credit cards spread over 10-30 years of payment. It changes low priority debt into high priority debt and could lead to the loss of the house.
This is an excellent alternative for those who are seeking to repay their unsecured debt and for persons with good credit who qualify for a loan at a favourable interest rate.
What Is A Debt Negotiation Company?
These companies strive to achieve a settlement deal with their creditors. The payment company makes a payment straight to you each month. The payment is made in a savings bank account until the balance reaches a sum accepted by the creditor.
Your creditors do not receive any money when making payments to the debt settlement business. This implies that the creditor can either send the account to collections (which would be a bad record in your credit report) or take legal action.
Before using any debt settlement or debt negotiation company, check them out with the Better Business Bureau.
How Does Settlement Work?
In a settlement, the creditor accepts partial debt repayment and stops further collection efforts in a payment. Unfortunately, the creditor must disclose the amount to the authorities if the amount you have paid back it’s not enough, or they can also sell the remainder to another collecting agency. Amounts notified to authorities, such as the HMRC, may increase your tax liability and may damage your credit report further.
How Does Debt Consolidation Affect Credit Scores?
Failure to paying back your debts may negatively impact your credit score. Finding an efficient mechanism to repay your loans is important, and that’s where debt consolidation loans come to help. However, it is equally crucial to obtain expert advise on how a consolidated loan can affect your financial future and what is the best way to manage it.
Another element that can affect your credit report is applying for several loans in a short period of time, as it will be showing lenders that you depend on other credits to pay back what you have borrowed.
Can Debt Consolidation Pay Debts Faster?
Debt consolidation can contribute to reducing your monthly payment or the amount of interest you pay in some instances, but this depends on your financial status and your capacity to pay your monthly instalments.