Coming out of the spiral of debts is an onerous task and no one wants to remain entangled in the web of debts. If you have more than one outstanding debt then debt consolidation is the best option for you. Debt consolidation is getting a new loan to pay off all your existing debts. You can combine all your outstanding loans into a single larger loan with just one monthly repayment. You are therefore borrowing to pay off your debts. You have a more manageable loan to pay off all your debts.
Almost all forms of debt including personal loans, credit cards, lease to own equipment or purchases; store cards and other unsecured loans can be consolidated. A debt consolidation loan reduces overall monthly debt, saves on interest fees and helps to establish a monthly household budget and improve credit rating by paying creditors in a timely fashion. If used properly a debt consolidation loan helps in clearing debt faster. However if there are more serious underlying problems, then a debt consolidation loan may only provide temporary relief from creditors.
Debt Consolidation comes in two forms :
Secured loans – Secured debt consolidation loans are secured on your home and therefore only available to homeowners.
Unsecured loans - Unsecured debt consolidation loans are personal loans available to all including tenants.
Advantages of Debt Consolidation:
Facility to consolidate all the secured and unsecured debts.
Option to switch to a cheaper one-debt consolidation alternative instead of several loans.
Additional money can be released to meet unexpected commitments. One payment under a debt consolidation is always much more convenient than five or ten smaller payments. If the requirement is for replacing credit cards debts, it removes the need to meet the minimum repayment on each card and the associated high interest rates charged.
However debt consolidation funds have limitations for people:
Who have already consolidated their debts several times.
Whose new loan application includes debt from previous consolidations.
Who wish to remove debts from store or credit cards in order to start using them again.
The person runs a risk of loosing his home if he/she has taken a secured debt consolidation and is unable to make payments. A debt consolidation loan will mean cheaper payments each month, but over a period of time you will still have to repay all the money you owe. If you choose to reduce your monthly payments by increasing the repayment period of your debt consolidation loan, you may end up repaying a larger amount, as you will be paying interest over a longer period.