How To Consolidate Your Debts: A Beginner’s Guide

debt-consolidation example

You have found yourself struggling with debt, but do you know how serious the situation is? Are you aware of how much you owe? The answer to this question for many people will be no. When you find yourself in debt, it’s not usually just one source. Instead, you will find yourself with multiple debts from different sources. You might, for instance, find yourself with debt spread over multiple credit cards. Or, perhaps you have different types of debt. As well as credit card loans that need to be paid, you could also have overdrafts, short-term loans and other types of credit.

One of the problems that people in this situation often must deal with is their debt being stretched in so many different directions that it becomes completely unmanageable. Deal with debt from one source, and you still have four more tugging at your finances. That’s where debt consolidation loan can provide an effective solution. Using this resource, you can make your debt far more manageable and ensure that you can get a grasp of your situation.

What Is a Debt Consolidation Loan?

The first thing that you must be aware of about debt consolidation is that it is a loan. You have to understand that you will be borrowing from one resource to pay off and manage the multiple debts that you currently hold. By doing this, you can ensure that your debt is far easier to handle. You won’t have multiple debts to pay off. Instead, all the money you owe will be packaged into one sum. As such, you will be able to pay it off like any other bill that comes out your account. It immediately becomes far easier to manage.

There are various companies online that offer debt consolidation. As such, you need to make sure that you are finding the right service. There are a few factors to consider here.

Secured And Unsecured

There are two main types of consolidation loan. The first is a secured loan. With a secured loan, you will put up something that you own as collateral usually your home. If you fail to pay off the debt, the lender will be able to sell this is to pay off the money you owe to them. This could be your house or your car, and as such, this type of consolidation loan can be quite risky. However, due to the risk, the interest rates are also often considerably lower compared to an unsecured loan especially if you have a bad credit history.

In the case of an unsecured loan, there is no product or property to secure the debt. Instead, a lender will check your credit history and determine whether they want to offer you the loan available. If they choose to offer you the loan, then your ability to pay it back will impact your credit score.

Is It The Right Option For You?

Before you commit to debt consolidation, you must make sure that it is the right decision. For instance, you need to think about whether it is cheaper. If you are taking out a consolidation loan, you should be able to get an interest rate that is more beneficial and easier to manage. Some lenders will charge you more in interest. However, they will offer you a more manageable repayment plan so the change could still be worth it, despite the added cost.

You might also find that there is a charge for moving the debt. Switching your debt to another lender can be expensive, and you will need to investigate whether you are responsible for this cost. You will also need to check that there aren’t any hidden fees for making this move. Some consolidation lenders will charge you a consolidation fee.

Do discuss the repayment plan that is on the table and make sure that it is manageable. Do not take out a consolidation loan if the repayment plan that is available will be too much for you to handle. Ultimately, this will just push you further into debt, and that’s the last thing that you want. Most lenders will discuss the repayment plan with you and help you find a solution that is manageable and that you can work with.

It’s important then to think about your circumstances. Are you prepared to commit to a long-term repayment plan? Are your circumstances secure? If you don’t have a stable career and your income could change on a monthly basis, this might not be the best option for you. However, if you are comfortable in knowing your income will remain at the same level this could be the right choice.

We hope this helps you understand debt consolidation, what it is and how it could help you if you are struggling with your level of debts.