Debt consolidation is a process by which a person can combine many unsecured debts into a single bill. This can be of great help, especially to individuals who are beset by varied monthly bills/payments. It is possible to consolidate different kinds of debts such as payday loans, court judgments, credit card bills, medical expenditures, holiday debt, utility bills, student loans, taxes, and business debt, etc.
Thus, rather than needing to make different payments to different collectors or creditors every month, you will end up paying just one bill/payment. This can help overcome worries about late or missed payments as well as ensure that all bills/debts get duly addressed.
Consolidation of debt can be a wonderful option because it not just simplifies monthly payments and makes it more efficient, but also (in many scenarios) results in a lower monthly payout and/or a lower interest rate. It is however important to remember that debt consolidation loans are not the only correct option for people struggling with monthly payments or debt. You will need to do some calculations and some homework or seek the assistance of a debt manager/counselor to ascertain which option will offer you the most benefits.
Mechanism of debt consolidation
Debt consolidation can assume many different forms such as a credit card balance transfer, a personal loan, debt management strategy, and a HELOC (home equity line of credit), etc.
Irrespective of what plan best suits you, you have to remember that the working of debt consolidation stays the same. This means that most or all of your debt gets lumped together into one payment as a means to streamline your finances or save money, or both.
For instance, if you have to make payments for outstanding medical expenses and several credit card bills with high rate of interest, then a good choice would be to apply for a personal loan and pay off such debts. Subsequently, you can remain focused on making monthly payments for just the personal loan, and in an ideal scenario, the personal loan will have a lower rate of interest as compared to the interest being paid on the medical and credit card bills. It may be noted that the interest rate for the personal loan may not be lower, but it is recommended to find a personal loan with the least interest rate so as to reduce the overall burden of monthly repayments for the personal loan.
The specificities of the workings of debt consolidation are dependent on and differ according to the type of underlying debt and the debt consolidation method chosen by you.
Experts have stated that debt consolidation cannot be a good choice is the overall debt is over fifty percent of the income. Also, it is not a good option if there is not a regular income source that covers more than the monthly expenses and debt consolidation loan repayments. It is also important to remember that people with bad credit will not get a good interest rate, which renders debt consolidation moot. It may however be noted that the option of debt consolidation for people with bad credit is available and you should research on all the associated interest rate options available in the market.