What Is Debt Consolidation?
Debt consolidation occurs when you combine all your debts (for instance, credit cards, medical debts, and/or bills) into one new monthly payment instead of several individual payments to each lender. With debt consolidation, you pay a lower interest rate compared to the interest rate set for each lender. The repayment period is increased so that one can lower their monthly debt payment. In addition, you can reduce the total amount of the loan to as much as 50% to 60% of the total loan amount. This will lower the interest rate, your monthly charges, the amount you owe, and having just one reduced payment will simplify the process.
More advantages to consolidating your debts are that the reduced payments give you the financial means of eliminating additional charges such as late fees, other miscellaneous charges, and other costs. Furthermore, when you are paying a lower interest rate you will have reduced interest expenses meaning that you will be able to pay more toward your principal payment.
What Is A Debt Consolidation Loan ?
A debt consolidation loan is a type of financial arrangement whereby the consumer takes out a single loan to help pay off various debts such as credit card balances, medical and/or other bills and any other outstanding debts. The key to this type of loan is that one must obtain a lower interest rate than what one is currently paying so as to make this a viable financial option. This type of loan will usually be secured with collateral such as one's home or vehicle(s).
Types Of Debt Consolidation Loans
Medical debt consolidation is when you combine all your medical debts such as hospital, medical, and other related debts into one monthly payment. A medical debt consolidation loan is a type of loan that is specifically suited for this kind of debt.
Other types of debt consolidation loans are:
- Personal Loans: this is a type of unsecured loan which has fixed payments over a fixed period of time. Once you are approved for a personal loan, you can use it to consolidate your debts.
- Debt Consolidation Loans: banks and credit unions offer this type of loan specifically to combine one's debts. Advantages include a lower interest rate and lowering one's monthly payment by increasing the repayment period.
- Home Equity Loans: this type of loan is granted when you use the equity or amount that you have paid into your home as collateral. In order to get this loan you must have paid a good amount of equity and be in good credit standing to qualify for this loan.
- Credit Card Balance Transfers: this is when you transfer all your credit card debt balances into one credit card lender so that your payments would be lower than if you had to make payments to all your credit cards. Advantages of transferring credit card balances include a lower annual percentage rate of interest on each balance that is being transferred plus a credit card transfer may often include a low or no interest rate introductory period as an incentive to transfer one's debt.
Benefits Of A Debt Consolidation Loan
With Secured Loans:
- Lower interest rates compared with consolidating with unsecured loans making the monthly payments lower and more affordable.
- Sometimes interest payments are tax deductible, for instance interest that is paid on loans that are secured by real estate is permitted to be used as a tax deduction.
- A single monthly payment carrying a lower interest rate compared with paying multiple interest rates for multiple debts, for example, with credit cards, will most likely ease your financial burden.
- Secured loans are usually easier to get because there is less risk for the lender.
With Unsecured Loans:
- Since you do not have to risk your property, this is the biggest benefit to consolidating your debts with an unsecured loan.
- While consolidating your debts with an unsecured loan may generally result in higher interest payments compared with consolidating with a secured loan, the interest rate for an unsecured loan may be lower than what is charged on the balances for many different credit cards which will lower both your interest payment burden as well as your monthly payments.
Debt Consolidation Loan In Relation To Loan Brokering
A loan broker is an intermediary between a borrower and a lender. A debt consolidaton loan broker will gather information from the borrower concerning what type of debt consolidation loan they require and then sort through many lender profiles to locate those that offer debt consolidation loans. The broker will then analyze which debt consolidation loan is right for the borrower's situation and earns a fee based on the size and type of loan. With our high-income loan broker program, you can get started as a loan broker in about 10 days.
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