Dealing with your debt may seem like a scary prospect, but getting a handle on your loans is the best way to find your way out of it. There are a number of ways to manage your debt and the sooner you make a plan to deal with your debt, the better it will be for your finances. Debt consolidation is one debt management solution, and an option favoured by many hoping to improve their financial standing. Debt consolidation is a process whereby all of your debts are consolidated into one lump sum so that you are paying one loan back rather than many. It is particularly useful if your debts are from high interest loans, such as certain credit cards or similar debts.
How debt consolidation works
You can either consolidate your debt on your own, and approach your bank for a suitable loan, or you can get help from a debt consolidation company. Either way, you'll find that debt consolidation allows you to ensure that your debt is easier to manage and monitor, as you don't have to juggle payments. What's more, debt consolidation typically allows you to secure a lower interest rate or fixed interest rate for your payments.
Types of debt consolidation
Normally when you opt for debt consolidation, you will need an asset to secure the loan against - for example, your home. This acts as collateral and typically offers you the option of a lower interest rate as it reduces the risk for the lender. However, you can also simply collate a number of unsecured loans into one unsecured loan, although interest rates will not be as low as a secured loan. You need to consider that if you find yourself in a position where you cannot pay a loan secured on your home you could end up losing your home. Payment protection insurance could help you manage this risk but then you will be paying an additional cost that could be more expensive than an unsecured loan.
Debt consolidation companies
Those in debt often turn to debt consolidation companies to help them negotiate with their lenders. Debt consolidation companies buy the debts off their clients and sometimes they are able to purchase the loan at a discount. Some debt consolidation companies then pass this discount onto you - so it's well worth searching for the best debt consolidation company for your needs. Once you have consolidated your debts, you may find it easier to get yourself out of debt.
Is debt consolidation right for you?
There are several things to consider when deciding if debt consolidation is good for you, such as the total cost of credit, the duration of the new loan and the change in risk if you are considering a secured loan. You should seek professional advice ideally from an organisation that does not benefit from selling you a debt consolidation loan.
It is essential that you fully understand any new agreements that you are getting into. Do yourself a favour and get some good advice.