What Is Debt Consolidation: The word “debt consolidation” refers to an act of seeking a loan to pay back other consumer debts and liabilities, usually unsecured ones. Simply, it is a kind of mortgage refinancing that involves taking out one loan or credit to pay off many others.
In this many debts are connected, resulting in a large piece of debt or single piece with more favourable terms of payoff. These payoff terms include a lower monthly payment, lower interest rate, or both of them. Customers can use debt consolidation as an instrument to deal with credit card debt, student loan debt and other liabilities.
It usually refers to a particular personal finance method directing high consumer debt. Still, sometimes it also reflects the fiscal approach of a country to consolidate government debt or corporate debt. This approach can guard the lower aggregate interest rate to the whole debt load and gives the ease of servicing only one mortgage or loan.
Types of Debt Consolidation
There are two broad categories of debt consolidation loans– unsecured loans and secured loans.
Secured Loans: This is a type of loan which is backed by an asset belonging to the borrower. It includes taking a mortgage on a car or house. This asset works as collateral for the given loan.
Unsecured Loans: Unlike secured loans, unsecured loans are not backed by an asset and are more difficult to obtain. They have low qualifying amounts and higher interest rates. However, the rates in both types of loan are still lower than that of interest rates charged on the credit cards. And in most cases, these rates are fixed so that they do not change throughout the repayment interval.
There are other means too through which you can merge your mortgages by consolidating them into a single piece or payment. The popular ones are listed below:
Debt Consolidation Loans
Many peer-to-peer lenders, traditional banks and creditors offer debt consolidation loans. They pay these loans as a part of a payment plan to the debt seekers who face the difficulty of managing the size and number of the outstanding mortgages. Primarily, it is for consumers who want to pay high-interest, multiple debts.
Another method is to merge all the credit card payments into a single (new) credit card. This can be an excellent idea if it charges little or no interest in the given duration. One can also make use of the balance transfer feature of the existing credit card if it offers some special advancement on the transaction.
Home Equity Loan
The Home equity loan is also known as home equity installment loan or a second mortgage or equity loan. It is another type of consolidation where the interest allows homeowners to obtain a loan against the equity in their residence. The amount of credit is decided based on the difference between the homeowner’s due debt balance and the current market rate of the house. It has two main varieties, including HELOCs (home equity lines of credit) and fixed-rate loans.
Student Loan Programs
There are some consolidation options given by the central government of different countries to the people with student loans. They offer these mortgages through the Federal Direct Loan Program. The new rate of interest is the aggregate or mean value of the previously provided loans. However, it does not include private loans.
Advantage and Disadvantage of Consolidation Loans
Debt consolidation is the best instrument for individuals who have multiple debts on them with monthly payments or high-interest rates (especially for people who owe $10,000 or higher)
Although the monthly payment or interest rate may be lower on a mortgage consolidation loan, still, it is essential to consider payment schedule along with it. More extended payment schedule indicates paying more money in the long run.