An easy way to define debt consolidation is, availing another new loan to pay off existing liabilities and debts. Under normal circumstances, the unsecured debts are paid off through such loans. An individual can have multiple numbers of debts to pay.
Debt consolidation tends to combine all small debts into one larger piece of debt. This favors the debtor with an easy payoff facility. A favorable payoff can include both the conditions of:
- Having a lower interest rate and
- A lower monthly payment
- Or can be both
Bringing everything under one roof or debt consolidation can be in several ways. For instance,
- Consolidating all the existing payments of credit cards under one new card. This is helpful especially if the new card charges very little interest or none at all. An existing credit card’s transfer of balance can also be put into good use especially if there is a special promotional offer.
- The second way is that of home equity loans. The interest for this loan is deductible by taxpayers.
So, to put it in perspective, debt consolidation loans are specific instruments that are offered by the creditors as very much a solution and plan. The plan that helps the debtor to pay off his or her outstanding credits.
Now, why would a creditor seek money for a borrower by offering debt consolidation loan? That’s because this very much enhances the chances of collection. Consolidation loans are generally on offer from various financial institutes like banks and specialized debt consolidation companies and even credit unions.
Now to focus on the types of debt consolidation loans in the market. There are 2 types:
- The first is a secured loan. These loans have the backing of an asset belonging to the borrower. The asset can be that of a car to a house. This very asset acts as collateral for the loan.
- Second type of debt consolidation loan is an unsecured loan. This loan does not have the backing of an asset and is difficult to obtain. The loans usually have higher interest rates along with low qualifying amounts.
The marked similarity between the two above stated loan types are; both have interest rates lower than what is charged on credit cards. And to add, the interest rates do not fluctuate over the repayment time. The rates stay uniform.
So how long does it take to pay off a debt consolidation loan? Experts of credit counseling service companies put it anywhere between three to five years.
It must be kept in mind as a reader of this peace, debt consolidation loans do not erase the original debt. They happen to transfer all the existing loans of a borrower to a different lender or type of loan. If an individual is seeking total relief from debt, it is advisable to go with debt settlement. A debt consolidation loan does not reduce the number of obligations for a borrower to pay back.
Loans of this type are most beneficial to people with multiple debts and are regularly getting calls or letters from creditors.