If you don’t know, debt consolidation loans are a great way to get your finances in order. But the whole process is not so black and white. There are different types of debt consolidation loans and all of them serve a specific purpose. There are also several advantages and disadvantages of going for this type of loan. There is also the confusing between debt consolidation and debt settlement. But don’t worry about all of that, let me take you through all of these points one by one.
BRIEF INTRODUCTION TO DEBT CONSOLIDATION LOANS
If you don’t what the concept is, it’s pretty simple. It is the process of you bringing all the liabilities which you might have including credit card debt, car loan, payday loan and any other type of loan into one loan which has been specifically taken to pay off all of these liabilities. This so-called new loan will usually have better interest rates over the long run. The banks on the other hand will get better chances of consumers actually paying off their debt.
You can get this done directly by the banks or you credit company. But keep in mind that the chances of getting this done depends highly on your credit rating and credit score.
DEBT CONSOLIDATION VS DEBT SETTLEMENT
The difference here is simple, debt settlement basically means that you are negotiating with the company or bank to give you better terms. you are trying to basically get some of the debt waived off. On the other hand, in debt consolidation, there is no change being made to the actual amount you owe, you are just repackaging it into a better deal with better terms.
DIFFERENT TYPES OF DEBT CONSOLIDATION LOANS
In terms of concepts there is the secured and unsecured debt. The distinction there is pretty simple, one involved giving some kind of a collateral to the bank and the other doesn’t. unsecured loans usually have worse interest rates and overall terms.
But other than these differences, there are different kind of products you can opt for.
The first one is the classic debt consolidation loan which a lot of creditors offer to clients which have a better history of repayments and overall credit score. Not just banks and big institutions but even peer to peer creditors offer this route.
Other than this is the option to opt for a new credit card which is specifically given to repay already existing credit card debt. The interest rates and payment structure are varied specifically for that purpose. Usually, the interest rate on this new card is much lower and balance transfer feature.
Another type is the student loan program. Keep this in mind that this type of consolidation is rarely available for private loans. This is a bid from the government’s side to give people better terms on their existing student loans. But this is also available to only those with a good payment history. What this does is provide interest rates which are an average of all the previous loans taken out.
Other lesser-known option is to opt for a home equity lines of credit, or also known as HELOCs as debt consolidation option.
ADVANTAGES AND DISADVANTAGES OF DEBT CONSOLIDATION
When you take a consolidation debt loan some of the offers which you were getting on previous credit card loans and other types of loans will end up disappearing, an example of this is interest rate discounts and rebates. Another example if losing benefits on original credit cards such as special access to airport lounges and offers on stores etc. There is also the disadvantage of paying for a longer time period. You should also pay attention to the payment schedule on the new loan.
But the advantages fay outweighs these disadvantages. You won’t have to worry about multiple bills with varying interest rates. Usually, the new interest rate you get is much less than the average of previous loans. Even if you have to pay for a longer period of time, you might end up paying less than what you would have paid for the original debts.