Most people resort to borrowing cash to pay for significant purchases. But sometimes, it can be overwhelming to pay for all financial obligations, from car loans to credit card dues and other monthly expenses.
If you’re one of the many who are struggling to pay off what you owe to multiple companies, debt consolidation may be an attractive proposition. But what is it and how does it work? Read on for some of the answers.
What Is Debt Consolidation?
With the rising costs of basic needs like utilities, housing, and education, it’s unsurprising for individuals not to have debts these days. Wherever you may be in the world, you can’t escape from seeking different types of funding assistance, which often have high-interest rates attached to them. Fortunately, lending companies offer credit relief services in several locations, even in progressive locations such as debt consolidation Toronto.
To the uninitiated, debt consolidation refers to the process of tapping financing services to pay off several financial liabilities. It’s similar to applying for a loan, only that instead of a big-ticket purchase, you’re lending to pay off all your existing debts.
How Does Debt Consolidation Work?
Having to deal with several accounts can be overwhelming, especially if you’re facing financial hardships. If you have multiple debts and are struggling to pay them off, you can approach credit relief companies, banks, and other lending companies that offer these particular products. Take out a substantial loan to settle your accounts, including housing, car, and student loans, so you can make one monthly payment to pay your new loan. So, instead of settling your accounts with different companies, you’ll be left with a single repayment obligation.
Types Of Debt Consolidation Loans
Loans for debt consolidation can either be secure or unsecured. Secured loans refer to a financing type that requires a borrower to submit a valuable asset as collateral for the loan. If a debtor fails to pay for a particular period, the lender may take possession of the property.
Inversely, unsecured loans are credit products that don’t require borrowers to present collateral. However, they’re much harder to get and require more stringent requirements, have higher interest rates, and lower qualifying amounts. Additionally, you may not qualify if you have an unimpressive credit score.
- Balance Transfers
Most credit card companies offer balance transfer programs. When applying for a new credit card, you can transfer your balance from your existing credit cards, often with low introductory or zero interest rates. This feature is a lifesaver if you’re struggling to pay off your current credit card debts straddled with high-interest rates.
There’s one caveat with this offer, though. As banks offer balance transfer options to entice new clients, they only apply for a limited time. If you’re approved, make sure to pay within the promo period to enjoy low repayment interest rates.
- Debt Consolidation Loans
There are various loan products customized based on a borrower’s needs. Once such financing service is a debt consolidation loan offered by traditional lenders such as banks, credit unions, debt relief companies, and non-traditional financing companies such as peer-to-peer lenders may suggest this type of loan repayment product, too. These loans can either be secured or unsecured depending on the amount involved and the borrower’s risk rating, among other considerations.
- Home Equity Loans
Home equity lines of credit (HELOC) are secured loans that allow a borrower to access additional financing by using the equity as collateral. It works like a credit card, where a debtor can ‘withdraw’ cash from the maximum amount and period set by the lender. The borrower has to pay back the amount owed, along with the interest. Once the draw period ends, the lender can extend the credit line or start asking for repayments from the creditor.
- Student Loan Programs
Individuals who racked up significant amounts on federal student loans can avail of consolidation options offered by the Federal Direct Loan Program. As the name implies, all your student loans will be lumped together to allow for a single repayment scheme. However, private student loans don’t qualify, but borrowers can consider financing companies that offer refinancing solutions.
Debt consolidation is ideal for individuals who are willing to pay off their debts and are eager to control their spending. Before committing to a new loan, borrowers must consider their current financial situation their capacity to pay. For instance, if your new debt will likely increase your monthly financial obligations rather than reduce them, think twice as you may get sunk deeper into a debt quicksand.
Additionally, borrowers who can’t seem to control their spending habits may end up with more debts on top of their recently approved debt consolidation loan, which can worsen their financial struggles.
Ultimately, deciding to avail of a debt consolidation option requires you to analyze your debt issues and fix them. Successfully recovering from credit-related challenges allows you to achieve your financial goals, whether owning a new car, investing in stocks, raising funds for traveling, or retiring comfortably.