Debt Consolidation is often referred to as credit consolidation, balance transfer, bill consolidation etc; overall it is a financial instrument used to combine multiple loans and debts arising out of credit cards and other outstanding payments from debts. In other words, you will utilise one loan and pay off and close remaining loan accounts with the help of this tool.
How is it done?
Personal loans are used to optimise the purpose of Debt consolidation. These forms of debts offer lower interest rates as compared to that offered on credit cards and other credit instruments. Thus, debt consolidation will help you lower your monthly outgo towards your loan while helping you clear off all your debts and outstanding payments all in one go!
Debt consolidation helps simplify loan payments and eliminate the hassle of dealing with multiple vendors and multiple payment due dates. All you need to keep a track of would be one single personal loan payment and due date.
When does Debt Consolidation work?
You may often contemplate the idea of debt consolidation, especially when it is the need of the hour to resolve financial issues rather than adding to more of it. The major benefit of debt consolidation is that it helps you lower your monthly cash outflow and eases out the stress of dealing with multiple loans with unfavourable terms.
How to consolidate your debts and/or loans?
There are several ways in which you can consolidate your debts.
1. Choose a credit card Takeover loan to consolidate multiple outstanding payments arising out of multiple credit cards. The other way is to use the balance transfer technique, in which to transfer higher interest credit cards to a lower interest credit card.
2. You may choose a Personal loan to enjoy the benefit of a fixed interest rate or even maybe a lower interest rate compounded and pay off all your outstanding debts in one go. You can spread your loan payments over a long period of time.
3. Another way out is to opt for home equity loans or home equity lines of credit. It is a loan available against the equity on a property. Some people use this loan amount to clear off their unsecured loans.
Types of Debt Consolidation
Many financial institutions like banks, credit unions and digital lenders offer customised loans and personal loan options for consolidating your debts.
These instant personal loans are classified into two categories:
1. Secured loans – These loans demand pledging an asset against the loan provided to you. Mortgage loans, loans against property or car, and loans against gold or life insurance policy are some examples. The major reason why you would be tempted to opt for these loans is the low interest rate and lower risks. Also, for the loans taken against property, you may even be able to claim tax deduction.
2. Unsecured loans These loans do not demand pledging of an asset in order to avail such loans. Nowadays, digital lenders are providing unsecured loans with convenience and speed, as well as minimum documentation.
Debt consolidation can be a great option, however, while dealing with debts you must be wise and must assess all the factors before option for any instrument for paying off your outstanding dues.