When we talk about debt consolidation, Nationwide Debt Reduction Services defines it as a process wherein an individual can get a new loan to pay up other small debts, or bills. When this happens, all the loans are brought together under one loan that has only one payment in a month. The term consolidation takes effect because several debts are brought together into one loan, and that is why this sort of debt is called a consolidation loan.
To be realistic, it is not easy to combine all the loans into one. Each loan has its own repayment plan and its own interest rate. Each loan has a separate contract where money is borrowed by an individual and then it is paid back after some time with some payments. To consolidate and combine these debts, you need to ask for a bigger loan and then use the money advanced by that loan to pay off the smaller loans that you wish to have consolidated. People consolidate their loans, overdraft balances, payday loans, bills and credit card balances using debt consolidation.
Where can one get debt consolidation?
Finance companies, credit unions, and banks offer debt consolidation loans. If you also have trouble paying off your debts, you can also access a debt repayment program that will help you to consolidate your debt payments to be one payment. This can be viewed as a debt consolidation plan.
Reasons as to why you can get a debt consolidation loan
There are various reasons as to why people go for debt consolidation loans. Nationwide Debt Reduction Services have identified the following reasons:
– It makes finances simple because it helps to avoid having several debt payments for tracking and making payments on time each month. Having only one source of debt is easier for people to follow through.
– People can save money because of the reduction in interest rates. This is done by paying off debt that has a high interest rate with a debt consolidation loan that has a low interest rate; if you can get an approval of a consolidation plan that has a low interest rate.
– Having a small monthly repayment can make life easier. This can be realized if you get to consolidate for longer periods of time or at a lower interest rate.
– It is easier to pay off debt much faster. This can work if you have a low interest rate loan and you stick to the same monthly debt repayment. You will pay off your debt very fast because the interest won’t be eating up your money.
How consolidated loans are offered
When a debt consolidation loan is offered to you, the company that is making the offer will either use the money to pay off the loans that need to be paid off, or they will deposit the money in your bank account where you can use it in your own accord to pay the debts.
How banks and finance companies determine interest rates
Nationwide Debt Reduction services point out that there are two factors that primarily determine the debt consolidation loans interest rates. The first one is your credit score, and the second one is the collateral you place to cover the loan. The credit score is a representation of your ability to repay a debt that your lender has offered you in the signed agreement. If you paid your debt but you were late in making the payments, you will have a low credit score because you paid late which technically indicates that you never paid as the agreement stipulated. If you have a good score, your lender will be more confident in your repayment.
Collateral is an asset that is used to pledge that in case you cannot repay the loan, your collateral can be used to repay the loan. Banks and credit unions usually go for an asset that can be converted easily to cash. In most cases, this can be a vehicle or real estate. Some of the items that are not considered as collateral include household appliances, TV’s, equipment or tools.
A high credit score can help you to get a loan without collateral from a credit union or a bank, and you will get a good interest rate on top of it. But if you have a low credit score, you won’t qualify for a loan that has a low interest, even if you present the desired collateral.
Nationwide Debt Reduction Services advise that a better collateral can make you get a bank loan with a good interest rate. If you choose to place your home as your security, you will have a very good interest rate. If you also provide a new vehicle for your security, you may get a loan, but the interest rate is not going to be as low as when you present a real estate.