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Debt Consolidation Process can help with Debt Crisis

Personal_Finance / Debt & Loans Jul 02, 2019 - 07:18 AM GMT

By: Sumeet_Manhas


If you have lots of unsecured debts such as credit card loans or student loans, your efforts to repay those debts could chop off a huge chunk of your monthly budget. Thus, you need to choose a good debt relief option. Debt consolidation involves taking a single loan to repay off different liabilities and consumer debts. In effect, several debts are merged into a single, larger debt with more favourable pay off conditions. Better pay off terms may include lower monthly instalments or lower interest or both.

Does it work?

There are different ways you can lump your debts into a single monthly payment. For instance, you can consolidate all your card payments into a single, new credit card. This is a good idea, particularly if the new card charges minimal or no interest for a specific period. You can also use a current credit card’s balance transfer feature if it provides a special promotion on that particular transaction.

Property equity lines of credit or home equity loans is another debt consolidation method sought by most people. Often, the interest for this loan is deductible for any taxpayer who can itemize his or her deductions.

Theoretically, debt consolidation lets you use a single type of financing to pay off all other financial obligations. There is a particular instrument known as debt consolidation loans, provided by creditors as an important component of a payment plan to debtors who have difficulties managing their outstanding debts.

Lenders and creditors may be willing to accept debt consolidation terms as the entire process maximizes their chances of getting repaid even if the debtor is in deep financial crisis. These types of loans are offered by credit unions, banks, and other financial institutions. There are also debt consolidation companies.

There are two distinct forms of consolidation loans. You can acquired a secured loan that is backed your assets, such as a car or a property. The asset serves as collateral for the loan. Besides, you can get an unsecured debt consolidation loan. This type of loan is not backed by assets (collateral), may have a higher interest rate compared to a secured loan, and it’s challenging to acquire it.

Keep in mind that debt consolidation will not erase your debts. Rather, it is a technique that lets you transfer all your loans to a single lender. So, instead of making several payments to different creditors monthly, you will focus on repaying the debt consolidation loan – a single monthly instalment.

Is it a good idea?

Well, if you don’t have a stable source of income or a substantial amount of assets to repay your debts, debt consolidation is a viable option. Here are some of the reasons you may choose to consolidate your debts.

  • You have multiple financial obligations
  • All your debts amount $10k or more
  • You have been receiving letters and calls from your creditors, lenders and collection agencies
  • You are in deep financial crisis, and you cannot make consistent repayments
  • You are supposed to make monthly payments and have accounts with high-interest rates
  • You have tried to negotiate lower interest rates on different loans but in vain.

Keep in mind that having the right debt consolidation plan in place can stop your creditors, lenders or debt collections from coming after you. Besides, there may be a tax break. For instance, if your debt consolidation loan is secured with a property, vehicle or any other type of asset, you might qualify for tax deductions.

Obtaining a consolidation loan and handling it well can boost your credit score. For instance, if you pay the principal amount faster than you would have without the loan, and the balance is cleared sooner, there is a good chance your overall credit score will go up.

Wrap up

Merging all your debts or loans into one fixed-rate payment every month can help ease your financial problems. However, that doesn’t mean you should always consolidate debts for convenience. Unless your debts are too overwhelming and the multiple repayments have become a considerable challenge, the ease of one instalment monthly isn’t enough to opt for debt consolidation.

After all, getting a lump sum amount of cash to repay your lenders doesn’t mean you are free from debts. You still have to pay that loan. Therefore, learning how to spend wisely and improve your savings habits can help you get out of debts and achieve financial freedom.

By Sumeet Manhas

© 2019 Copyright Sumeet Manhas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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