Most people have more than one debt. You may have high interest credit cards, loans and mortgages. To pay off one debt you may need to borrow from someone else, creating yet another debt. The solution to this problem is debt consolidation.
Debt consolidation may be a good idea if you find yourself in any of the following situations:
- You're tired of making several different debt payments each month and would like to combine them into just one payment.
- You're having trouble staying current on the payments for your existing debt.
- Your existing debts have varying interest rates and you'd like to lock in one rate for everything.
- You want to reduce the amount of your monthly budget that goes toward debt repayment.
- You're looking for an easier way to pay off existing debt and become debt free
Debt consolidation loan is a loan that is used to pay off other existing debts, resulting in just one monthly payment. This type of loan is commonly used to combine unsecured debt, making it easier to manage your overall budget and stick to a repayment plan.
Debt consolidation loans are designed specifically for people who have taken on too much short term debt, in the form of credit and store cards, bank overdrafts and similar loans. These are usually charged at extremely high interest rates, often at rates in excess of 30%. In order to get these high interest loans under control, people take out a debt consolidation loan that is an amount sufficient to repay the existing debts. This loan will be fixed at say five years, and at a fixed interest rate of say eight per cent. This means that the interest repayments each month on the consolidation loan will be far lower than they would be for all the other short term debts. You are given the advantage that the debts will be fully repaid at the end of the term of the loan, something that is unlikely if you pay the minimum payments on a credit card balance.
Debt consolidation loans can be either secured or unsecured.
A Secured Loan uses something of significant value to secure the loan amount. The most common source of security for such a loan is your home. Secured loans are less risky for the lender, usually leading to a lower interest rate and larger amounts available for borrowing.
An Unsecured (Personal) Loan is not secured against something of significant value, so it is much riskier for the lender. This type of loan usually comes with higher interest rates, smaller amounts available for borrowing, and often includes restrictions on how you can spend the money you receive.
Debt consolidation loans are an increasingly common option for people in a variety of financial situations. Before you decide if it’s right for you, carefully evaluate the advantages and disadvantages of such a loan and take advantage of the plentiful information resources available to assist your decision-making process.
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