If you are someone who has a debt to repay carrying high rates of interest, taking help from a debt consolidation loan can prove to be beneficial with regard to paying off the debt faster and saving money. It is very important for a person to look into the respective potential benefits before taking a particular line of credit or loan, the drawbacks also need to be taken into account to avoid then the possibility of falling back into the old debt patterns. Most people are familiar with the many reasons that result in the racking up of debts. Due to the interest charges, the balance tends to grow over time, which results in the person being required to pay far more than what he/she had borrowed. This can lead to bin an unmanageable process for people, especially those who are unable to pay back the hefty amount.
In simple words, the process of debt consolidation is linked with a person being able to take out a loan which further covers the taken debt. The newly taken loan helps in paying off the debt, which includes the respective rates of interest, which accumulates across the accounts. When the person has paid the originally borrowed debt, then later the functioning of the debt consolidation loan is not different from any instalment loan, it requires the person paying off the loan through equal monthly payments.
There is absolutely no doubt about the fact that the process of paying a consolidation debt loan is rather simpler as compared to the typical line of credits. All the person will have on his/her will be having to make equal monthly payments, and this will pay the loan off at a defined length of time. This decision of taking a debt consolidation loan makes much intense financial sense if the person is able to get a low rate of interest.
Working of a debt consolidation loan:
The debt consolidation loans carry the status of being string debt repayment tools one can opt for. It offers loan to the person in need on a low rate of interest, a big chunk of the payment goes into the repayment of the original amount of loan borrowed rather than huge rates of interests, this helps the person to be able to get out of the debt faster and save some money as well.
Options for debt consolidation:
The number of options in the market with regard to the process of debt consolidation loans are quite a few. Each option has its own set of pros and cons. Following have been stated dome of the options which you can consider.
- Credit card balance transfers:
There are some credit card companies which allow their customers to transfer their high-interest balance onto a newly taken card that will either give a very low rate of interest or 0% of it, over a limited time period.
The person will be given a number of months for the introductory offer to be expired, to further pay the balance off at a low rate. If the person pays down the debt aggressively within the specified period of time, it will provide the person with a chance to save money.
The drawback of this option includes fees to be paid for a balance transfer. Not all, but most companies ask the person to pay a fee for balance transfer which will be applied on the new card, and these fees are mostly in between 3 to 5% of the total amount which is transferred. After calculations, if the fees to be paid on the new card is quite high, it would negatively affect the possible benefits that were to be received due to balance transfer.
- Lines of credit and home equity loans:
If the person owns a home, then this gives you the option of borrowing a loan against your equity for the purpose of consolidating the debt. The amount that will be borrowed by the person will be limited by the respective equity held by him/her. In simple words, the entire value of the person’s property, subtracting the outstanding balance of the loan in addition to the other prevailing factors. The value which further remains from it may make it possible to repay the debt.
Your home will secure the loan you borrow, and this will further result in the person qualifying for a low rate of interest as compared to opting for any other type of debt relief. It is a rather known fact that making use of a home equity loan can prove to be risky. The reason behind this is that the home of the person will serve as collateral for securing the respective loan taken. There is a possibility of the person end up losing his/her home if they fall behind on the required payments.
- Personal loans:
One more way of consolidating one’s debt is by taking out a personal loan. However, there is no such guarantee which will tell whether or not the personal loan will carry a good interest rate. The credit health of the person, income and various other factors play a key role in determining the rates of interest which will be charged on the personal loan. If the person carries a less than great credit, there is a possibility of him/her not qualifying for a low-interest rate carrying the loan.
Avoiding racking up of debt:
As explained in the above lines that debt consolidation loans help a person pay off even high-interest debts, it’s not the final and a magic solution. If you decide on choosing the debt consolidation option for the repayment of the loan, you might want to bring about certain changes in your respective lifestyle in order to make sure that more debt is not piled up.
Debt consolidation is undoubtedly considered to be a smart way of repaying your loans as compared to other options prevailing out in the market for you.