Debt Consolidation – A Quick Guide

Debt consolidation is a process by which all the loans that you may have can be aggregated into a single one. This is done when you find it very difficult to manage many different debts with varying rates of interest and monthly payment dates. After the debts have been consolidated, you are left with only a single debt and monthly payment to service. While the overall amount of the debt will remain the same, it may be probable that the monthly payment will be lesser than before due to interest rate rationalization and often a longer tenure to pay off the amount. The process is not without its risks and should be undertaken only when you are really in distress managing multiple debts and are ready to practice stringent financial discipline.

The Pros and Cons of Debt Consolidation

Among the advantages of consolidating individual loans are that generally you will be able to take advantage of a lower rate of interest, and spread out the repayment over a longer term thus making the monthly payment more affordable. You no longer need to track multiple loans and due dates and thus it is easier to stay organized and not miss payments. Your credit score is not impacted as you are still paying all your dues, which is not the case if you go in for debt management, debt settlement or file for bankruptcy.

However, despite the convenience of lower monthly outgoes, even in the best consolidation loans the total interest payable will often be a larger sum than before as you would be paying off the debt over a longer duration. If you use your assets like your home to secure the new loan and are not able to make the monthly payments as required you will be putting your home at risk. It is doubly important to be financially disciplined when you set out for fight debt with debt. If you do not change the habits that were responsible for your sorry state, then you could be potentially heading for a debt meltdown.

Types of Loans for Debt Consolidation

It will generally be easier to find a finance company to consolidate your multiple loans if you are ready to provide collateral. This can be in the form of some assets that are valuable enough to secure the loan that you are taking in case you default, such as a house or a vehicle. Since the lender has less risk, it is also possible for you to get a larger amount and an interest rate that is lower. In some cases you could also qualify for a tax deduction of the interest amount. However, you need to keep in mind that you are exposing your asset to risk and can stand to lose your home or car if you default.

It may also be possible to take a loan that is unsecured to successfully pay off your credit card balances, personal loans, etc. However, getting the loan sanctioned may be more difficult, especially if your credit score has already taken a beating. The amount of loan available will tend to be less and the interest rate higher because the lender is assuming more risk and has no collateral to back his exposure.

From Where Are Debt Consolidation Loans Available?

If you are considering getting a loan by offering your assets as collateral, then your best bet is to head for a bank or your local credit union, as it will be easier for you to get the documentation executed with a lender that has a local brick and mortar presence. However, if you are opting for an unsecured loan you can take advantage of the many online lenders that offer very quick and efficient services. You should also examine various offers for introductory or zero percent balance transfers from various credit card issuers if you have accumulated a large amount of outstanding on your credit cards. However, usually these offers are for a limited time so you need to be confident and disciplined enough to pay off the dues within that period else you may be caught up in a bigger debt trap.

Author bio: James Galbraith is personal financial consultant with long experience of suggesting the best consolidation loans for financially-distressed clients.