When people face mounting debt problems because of missed payments and high interest rates, they frequently resort to debt consolidation to get out of debt. Debt consolidation is the process of combining a number of high-interest debts into one low-interest monthly payment. Majority of debt consolidation techniques don’t ask for a loan. However, debt consolidation can also be performed with the help of loans (both secured and unsecured).
How debt consolidation works
There are both consolidation programs and consolidation loans. When you sign up for a consolidation program, the consolidator negotiates with your creditors on your behalf to lower your interest rates and monthly payments. You just have to send an affordable monthly payment to the consolidation company and the company would subsequently allocate the payment to your creditors and pay off your bills. In this way, you can pay off your high-interest credit cards, utility bills, medical bills, student loans and other unsecured personal loans.
You can also consolidate your bills by obtaining a consolidation loan. There are mainly two types of consolidation loans – secured and unsecured consolidation loans. A secured consolidation loan is usually a home equity loan where your home is kept as collateral. An unsecured consolidation loan doesn’t need any collateral but asks for a higher interest rate. You can take out a consolidation loan, pay off your creditors in full and then pay off the lender with a single monthly payment. This is beneficial in the sense that the interest rate offered to you is quite less than that of your credit cards. However, if you have poor credit, then it’s difficult for you to qualify for a consolidation loan.
What are the advantages of consolidating your bills?
Bill consolidation usually offers the following advantages to the consumers:
- All your unsecured debts are combined into one reasonable monthly payment that suits your budget
- Your interest rates are reduced which helps in lowering your monthly payments and saving money
- Your over limit fees and late fees are waived
- You don’t need to manage multiple creditors
- You don’t have to face creditor harassment
- You can avoid filing bankruptcy, make a fresh start and move ahead in life
Therefore, debt consolidation can essentially work as a helpful solution to handle your ever-increasing debt burden.