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 Find Out: What is Debt Consolidation?
Finance

Find Out: What is Debt Consolidation?

Debt consolidation refers to the process of using a loan or credit card to repay multiple debts – the purpose of this is to simplify your debt repayment. When you have one balance instead of many to repay, it becomes a lot easier for you to repay your debt. What’s more, you may even get a lower rate of interest from the lender. Although debt consolidation has many benefits, it has certain drawbacks as well. Here’s all you need to know about it.

How Debt Consolidation Works

Say you have many credit card balances and small loans with different monthly payments and interest rates. Rather than making payments towards each loan and credit card debt, you can consolidate all your balances with a single debt consolidation loan.

Types of Debt Consolidation

Credit card balance transfer: Balance transfer credit cards allow you to transfer your existing credit card balances to the card and repay your debt during the introductory interest-free period, which can last up to 21 months. The catch is that if you don’t repay the interest during this period, you’ll have to start paying interest on the remaining balance.

Debt consolidation loan: A debt consolidation loan is actually an unsecured personal loan that is specifically offered to help you pay off your debts. Debt consolidation loans have a fixed repayment period, fixed rate of interest, and stable repayment terms.

Home equity loan: If you are a homeowner, you can tap into the equity you’ve built up in your home and repay your debts with the money you borrow against your home. Typically, lenders will allow you to borrow between 80% to 85% of your home’s equity. The downside to this type of loan is that you need to repay it without defaulting, otherwise, the lender could repossess your home.

Should You Opt for Debt Consolidation?

Debt consolidation can help you consolidate high-interest debts and make your payments more manageable. But, keep in mind that consolidating your debts may not help if you have a spending problem. For instance, if you take a personal loan to consolidate your credit card debts and then start charging expenses to your credit card again, you’ll be in more trouble, financially speaking.

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