Debt consolidation acts as a tool where multiple debts are unified into a single, collective debt to pay off loans or other liabilities. It deals with the liabilities like – student loan debt, personal loans, credit card debts, or other liabilities.
It usually combines multiple debts with more favorable pay off terms like –
- Lower interest rate
- Lower monthly payment (or both)
A debt consolidation loan helps you to pay a single monthly amount instead of multiple payments, and at a lower interest rate.
Debt consolidation loans do not erase your original debt. Rather, they transfer your loans and credit card bills to a different company. Debt consolidation includes two different kinds of loans – secured and unsecured loans.
What are secured loans?
Secured loans are usually protected by one of your assets. The assets, such as – your car, house, or others, acts as collateral for the loan. The bank or lender holds on to your assets until you pay back your loan. Secured loans are one of the most acceptable ways to borrow large amounts. The entire loan is protected by your asset that provides the lender security that you will repay the loan amount. In case, you fail to pay back the loan amount. The lender pays off the loan amount by appropriating and selling the collateral.
What are the advantages of a secured loan?
Secured loans provide a range of advantages to the borrowers like –
- You get a lower interest rate
- You can borrow a higher amount of loan
- You get longer repayment term.
What are unsecured loans?
Unsecured loans are not protected by any assets and can be difficult to obtain. Unsecured loans can be – student loans, credit cards, or others where the lender takes a risk by approving the loan. Unsecured loans have a higher interest rate as the loan is not protected by any asset to recover the loan.
You are judged based on your:
- Current debts
- Credit behavior
- Income
- Employment history
- References
- Your savings
- Investment portfolio
- Personal assets as collateral
- Terms and conditions of the loan
What are the advantages of Debt Consolidation?
Debt Consolidations provides various advantages to a borrower having multiple repayments. Debt consolidation can help you:
- Gives you a lower interest rate
- Multiple debts are unified into a single, collective debt to pay off loans or other liabilities
- Low monthly repayments
- Helps in improving your credit score
- Debt consolidation reduces your multiple repayment stress
- Helps you to repay your loan faster.
Requirements for Debt consolidation
If you wish to opt for a debt consolidation loan, you will require the following details as listed below –
- Proof of your income or creditworthiness
- Your credit history
- Employment details
- Bank statement of last 2 months
- Details of the loans you wish to pay off
- Letter from your creditors
Although, debt consolidation provides you a lower interest rate and monthly repayments. It is always advisable to pay attention to your repayment schedule and terms. A longer repayment schedule means you need to pay for a longer time period. It is advisable to discuss with your lender about your repayment schedule at the current interest rate. So that you can compare it with a potential new loan. If you are facing trouble keeping an account of multiple loans. Feel free to reach out in our comment section.