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Having debts can be very stressful. It is more stressful if you have difficulty paying up. This calls for solutions. Debt consolidation is a solution on the list. Considered it a life saver, it’ll be useful for you if you understand what it involves.

Debt consolidation is getting a loan to be able to pay up and clear the other debts you may have, then pay off the debt. It involves approaching a new lender and getting new terms that involve a different interest rate. Debt consolidation, in turn, allows you to get money from one source (lender) to settle all different debts and credits that you may have.

Common major problems solved by taking up debt consolidation

Debt consolidation literally may help you in getting out of debt. The following are things to avoid:

  1. High-interest rates

Debt consolidation helps in getting out of debt
Debt consolidation helps in getting out of debt

Chances are that the actual debts you have command high-interest rates. This translates into a large amount of money ending up into your creditor’s pockets at the end of the day. You may even discover that your debt is growing as you continue repaying. A debt consolidation becomes the perfect way out. Debt consolidation gives you the ability to get out of the debt problem so that you not only settle your debt, but also get a new consolidation loan with a lower interest rate.

  1. Higher monthly payments

When you have many different debts, debt consolidation becomes a lifeline. With the use of a debt consolidation plan, you get the chance to combine different debts into one consolidated debt. This means there’s just one debt and one repayment amount to manage. The consolidation plan with a lower interest rate leaves you with less to pay, thus your monthly repayment amount is reduced.

  1. Bill confusion

Debt consolidation gives you the chance to be focused on only one debt repayment. For example, if you have so many debts and different repayment plans to service each month, should you forget to pay up or pay late, you will have to pay a lot more in the end. With debt consolidation, you just need to think of how to pay that one repayment amount by the end of the month and not worry about paying late or missing payments.

Types of debt consolidation plans

debt consolidation plans
debt consolidation plans

Debt consolidation is just a generic term to describe a lot of such options out there. It is important to have a lot of options to choose from as each one has its own characteristics. It’s all about you choosing what fits your financial situation and your ability to settle the debts.

  • Debt consolidation companies

Debt consolidation companies have been established to help people get out of debts. The use of a debt consolidation company involves getting a consolidation loan with a new interest rate from them. They give you the loan, you settle your debts and then focus on repaying them as per the agreement put in place. This is a great way to get out of debt. However, there is a catch with this option. You have to be very careful with the calculations that are involved here.

Debt consolidation and the rest of the other options available all depend on your ability to settle your debts, your source of income and how much of it goes into settling the debt. If you miscalculate, then you are in trouble. The interest rate could be set in a place where you realize you haven’t solved anything and in turn it is still hard to keep your head above the water. If you are not careful, debt consolidation may cost you your credit score and get you into trouble in the future.

To make sure all the above don’t happen, consider the time it will take to repay the debt. This will help you determine if, with the combination of the interest rate, debt consolidation will solve your problem. You must also be careful with making punctual repayments. Otherwise, you be forced to pay more than you had expected.

  • Home equity loans    

 Home equity loans
Home equity loans

This plan allows you to use the value of your home to get a loan. This program allows you to get between 75%-80% of the value of the home to help you pay up the debts that you may have. This time, the home is used as a collateral. A home equity loan has fixed terms, that means that the loan amount and interest rate are fixed. The time frame for payment is also fixed.

However, there is a catch. It’s your house which you have used as collateral for the loan. You have to consider carefully before you go down that road, making sure that the debt is worth putting your home on the line.

  • Balance transfer        

You probably have seen the “0% interest” adverts on debt consolidation loans. This is a plan that allows you to get the amount of money needed to settle your debt at a 0% interest rate for a period of time. First, you need to pay between 2%- 5% of the total loan amount. Then, for the next period of time that you are paying 0% interest, you must pay back the installment in full and on time. This period is between 6 months and a year. If you are late or skip a payment, your interest plan is cancelled and you will be charged interest from then onwards. It is also important to check the interest rate charged before you make the decision on taking up a balance transfer.

  • Peer-to-peer lending        

Peer-to-peer lending
Peer-to-peer lending

Peer-to-peer is a plan that allows lending companies to connect you with other lenders. They get you the loan and you pay back slowly with an interest. It is a win-win for both parties as the lender gets steady returns while the borrower gets the money to settle his debts. The loan has a time frame of 3-5 years, giving you enough time to pay up.

Is debt consolidation

Debt consolidation is a great financial decision to make. It gives you the opportunity to shape up financially. It also allows you to concentrate on just one consolidation loan and one repayment amount.

It is important for you to sign up for a financial plan which you can comfortably afford. It’s all good decision making and not getting into more debt after paying off your debt consolidation loan.


Author: George Nathan

George has been a loan advisor for the past ten years. He is the go-to person on all the information about APRs and interest rates. He hopes to gain enough capital to open up his very own online payday lending company in the near future.

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