A debt consolidation typically utilizes a single, large consolidation loan to cover previously accumulated debts. This process allows the larger debt to take place of the smaller debts, allowing an individual paying a single monthly payment for their debts.
Debt consolidations can be taken out by a single individual through a home equity loan or a debt consolidation loan from a bank or other financial institution. These forms of debt consolidation are respectively considered secured and unsecured loans.
There’s some risk in taking out a debt consolidation loan through a home equity loan. A secured loan requires one to use something of value as collateral for the impending loan. If an individual can’t pay back the loan, their possession may get claimed by creditors, making it riskier to use a secured loan for debt consolidation.
An unsecured loan can consist of a personal loan, credit lines and credit cards. Transferring balances to another, larger credit card is a simpler way to consolidate debt using an unsecured loan, though it may affect your credit score.
Consolidating debts through a debt consolidation company may also combine just monthly payments from smaller debts into a larger monthly payment. This usually requires that the person who owes the debt send a larger monthly payment to the debt consolidation company, where they will then divide the payment and send it to their creditors.
If seeking a debt consolidation, there are a few things one should regard:
• Benefits from lower interest rates from credit card balance transfers. Credit card companies usually charge about 3 to 5% of one’s balance when transferring that particular balance to another credit card. It’s better to pay one low rate on one credit card, rather than pay several low rates for more than one credit card.
• Go for unsecured credit. An unsecured line of credit works like a credit card, except for that a bank will send checks to allow an individual access to the funds within the credit line. Unsecured credit lines require monthly payments and accumulate interest, much like a normal credit card.
• Utilize a home equity loan to lower interest rates. Home equity loans or credit lines generally have lower interest and tax deductible rates. The payments for these loans or credit lines usually add on to one’s monthly mortgage payment.
Before taking on a debt consolidation loan from a qualified institution, an individual should read through any written agreement and terms to ensure the loan fits their financial situation.