How does debt consolidation work?

Debt is part of life for many people. It helps them put up a new venture or business, fund a college education, buy a decent house or support their family’s daily necessities. Many people depend on it for survival. Debt is not actually bad if you take full responsibility of it, if you pay on time or pay more than what is required per month. It can actually help you live a comfortable life. But let’s accept the fact that many people oftentimes fail to be a good payer or borrower until they didn’t notice that their debt goes out of control.

To help them get back on track, they look for professional help and one effective way is thru debt consolidation.

Debt consolidation is a form of debt refinancing where the borrower who is in default takes out one loan to pay off the others. In common, it refers to a personal finance process of individuals to address high consumer debt, but occasionally it can also refer to a country’s fiscal approach to consolidate government debt or corporate debt.

For people who want to roll multiple debts into one unified payment mode system, debt consolidation sounds like a good idea because it aims to reduce the total debt. It also restructures the debt for a lower interest and at the shortest applicable period of time.

Are you thinking of consolidating your debts?

First, you must know how it works and you have to consider a lot of important things before deciding to push through with this payment scheme. You must completely understand that when you consolidate your debts you will be transferring your credit card debts and loans into a single lender and this financial move also depends on your credit standing for you to qualify for lower interest rate with low payments.

Before you successfully consolidate your debts, you have to be aware of these considerations:

  • Your monthly total debt payments including mortgage and rent is within 50 percent of your monthly gross income.
  • Your available funds or resources can regularly cover monthly payments of your debt.
  • You have a good credit rating or credit worthiness to be able to qualify for a low interest consolidation or a zero-credit card loan.
  • You have the confidence to pay off your chosen consolidation loan within 5 years.

More debt consolidation tips here.

When you consider debt consolidation to help you manage your finances, you also need to know the two primary options to consolidate your debts that will roll out into one monthly bill.

  • First is the balance transfer to your credit card for zero interest. This will enable you to transfer all debts to your card and then you will pay full balance during a specific period.
  • Second option is to acquire a fixed rate consolidation loan. In this option, the money from the loan will be used to pay off your debts in installment within a given term. People with fair to bad credit standing can still qualify for this type of loan, but borrowers with a higher credit score will most likely qualify for a loan with lower interest rates.

To summarize, in debt consolidation, a borrower first applies for a personal loan then do a balance transfer for credit card or another consolidation tool through their bank or another lender. For a debt consolidation loan, the lender may pay off the borrower’s other debts directly—or the borrower will take the cash and pay off his or her outstanding balances.

Once the borrower has paid off the pre-existing debts using the new loan funds, it’s time to make a single payment on the new loan every month.

In general, debt consolidation makes it easier to manage finances especially for borrowers who struggle to make the most out of their hard earned money because of their debt.

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