Debt consolidation involves combining all your unpaid debts into one big loan and paying it off altogether. Instead of paying various creditors at different times, you can write out one check and pay them all at once. This procedure also reduces errors that could have led to additional payments and fines.
The three primary types of debt consolidation are:
- Debt consolidation loans
- Debt settlement
- Debt management plans
You must remember that debt consolidation does not take place overnight. It’s a long process that assists you in getting out of your debts. If you smoothly manage the procedure, it can help you in many ways. This include:
- Reducing your monthly bills
- Reducing your interest rates
- Guarding your credit rating
- Assisting you in paying your debts quickly
Debt consolidation loans
A debt consolidation loan ensures that all your payments are made to one creditor instead of many payments to various lenders. These loans have a lower interest rate than the amount that needs to be paid, which makes it quicker to consolidate debt and decreases monthly bills. Different debt consolidation loans include student loans, personal loans, money transfers through credit cards, and home equity payments. It is a convenient way of putting together all your bills into one final bill. It is also helpful in keeping track of all the expenses you have incurred during a particular period. However, you may have to go through a longer payment period than expected. Despite this, you should still consider opting for this method if you have numerous loans piled up.
Many companies provide debt settlement services. The first step is to stop their customers from paying their creditors. Instead, they ask them to transfer monthly payments into their company to deposit it into an escrow account. It takes approximately 36 months for the account to reach its target. When the company meets the target, it makes offers to the creditors directly. You must remember that the creditor is not obliged to agree with the company. Late fee payments may also pile up during this time, making the loan much larger than originally.
Debt management plans
Most financial advisors believe that debt management plans are the best form of debt consolidation. The most preferred debt management plans are carried out by non-profit organizations. They begin their credit counseling sessions to help you calculate the amount of money you can borrow from creditors. These agencies can also help you get a lower interest rate for your loans and waive the late fee payments to make your monthly expenses more affordable. The company will ask you for one bill, which will be divided and sent to your creditors individually. Although opting for a debt management plan affects your credit score, after three to five years, all your loans will be paid off, which will improve your credit score.
You should always be careful before making any decision to consolidate your debt. Choose a particular type of consolidation wisely depending on your debt and creditors.