Debt consolidation is where you take a new loan to pay off other liabilities and debts. In this case, multiple loans are put together into one large piece of debit with favorable terms. The favorable terms may be a lower monthly payment, lower interest rates, or both. In debt consolidation, the new loan is intended to clear other debts.
Consumers use debt consolidation to pay off a small debt using one big loan. This helps to save on interest and the financial costs associated with the smaller loans. Instead of paying for the small loans separately, a consumer can consolidate them into a single liability and clear them.
How to apply for a debt consolidation loan
Debit consolidated loans can be applied at credit unions, banks, or credit card companies. These loans are easy to apply, especially for customers with good payment history and a great relationship with their institution.
Debt consolidation is done on debts that are not secured by an asset. These include personal loans, the amount owed on a credit card and education loan.
When should you consider a debt consolidation loan?
Debt consolidation is possible if fees do not wipe out savings, and the customer can afford to make payments until the entire loan is cleared. In addition, debt consolidation is viable if the customer ends up paying less interest.
It is important to note that debt consolidation does not erase the original debt but instead transfers the loan obligation to another lender or changes the type of loan. Broadly, there are two types of debt consolidation loans, secured and unsecured loans.
Secured loans are backed by collaterals proposed by the borrower like a car or house. On the other hand, unsecured loans are not secured by collaterals and are more difficult to get. Besides, unsecured loans have higher interest rates.
There are several ways to consolidate your debt into a single payment.
Debt Consolidation Loans
You can obtain a debt consolidation loan from creditors like banks and peer-to-peer lenders. Financial institutions offer these loan products to help borrowers manage the size and number of their outstanding debts.
Credit Cards
You can also consolidate all your credit card payments into a single new credit card. The new card should come with favorable conditions like interest holidays.
HELOCs
Consumers can also use home equity lines of credit (HELOC) or home equity loans to consolidate their debts. The interest on these loans is deductible for taxpayers who itemize their deductions.
