Combining multiple debts with a new loan with a favorable term structure like low-interest rate structure and tenure is known as Debt consolidation. All other debts are paid off by using the amount from the new loan. Because of this, the interest will save as well as the small loan’s finance cost owned by them. The borrower needs to pay only one payment instead of paying money to more number of creditors.
Debt consolidation can occur on loans that are not related to an asset.
- Personal loans
- Education loans
- Credit card payments
These are some of the examples of unsecured loans that are subject to debt consolidation.
DEBT CONSOLIDATION LOAN TYPES
The types of debt consolidation loans are given below
- Home equity loans
- Credit card amount/Balance transfer
- Low rate of personal loans
- 401(k) plan Loan
WHAT ARE THE STEPS TO BE FOLLOWED BY BORROWER?
Borrowers have certain steps to follow when deciding to consolidate debt.
- Identify your debt liabilities, the total amount of your lender, the term or tenure.
- Next step is to apply for a consolidated loan.
- Use the consolidated money only for pay off your debts; otherwise, it may become a big burden.
- Stick to the consolidation loan payment cycle.
We can easily understand about consolidated loan using an example.
For example, you have a loan liability of Rs 5, 00,000 that consists of
- A two-year loan of Rs 2, 00,000 and an interest rate of 15%.
- A loan of Rs 3, 00,000 which carries an interest rate of 12% per annum.
For the above loans, the monthly payment may around sixteen thousand (16,000).To overcome this burden. You can visit the consolidation loan providing company; they offer you the debt consolidation loan so that you can pay the monthly payment of around ten thousand (10,000).
It is far better than paying debts for 2 loans separately. Moreover, the duration for the payment may also get increased. So it is one of the best ways to get rid of all your tensions over debts.
ADVANTAGES OF DEBT CONSOLIDATION LOAN
- Single payment instead of multiple payments
- Low rate of interest
- Credit rates will improve
- Get rid of debt monthly tensions
- Quickly pay it off
DISADVANTAGES OF DEBT CONSOLIDATION LOAN
- It does not solve financial problems or situations on its own.
- Sometimes, needs to pay a higher rate.
- Before buying a consolidated loan, you must be aware of all the details such as payment duration, interest rate, additional fees, terms and conditions etc.