Debt Consolidation FAQ and Answers
If you are living with a lot of debt, it could get really overwhelming as you may fall behind on your monthly bills when paying off loans and find it difficult to cope with the troublesome interest calculations. However, if you are looking for a way out, there are many alternatives that give you better control over your debts. Debt consolidation is one of such proven method.
What is debt consolidation?
To put it in the simplest terms, debt consolidation refers to the process of consolidating multiple small loans into a single large loan. This consolidation may not eliminate your debt, but makes it more controllable to plan and easily pay it off. Successful debt consolidation can further streamline the process and give you more flexibility.
However, the advantage of debt consolidation is not only limited to getting all into one, but on properly planning it, you can also effectively reduce your monthly payments and interest rates.
Which types of debts can be consolidated?
You can consolidate any unsecured debt including medical bills, credit card payments, student loans etc. Based on the type of debts you have and the amount you owe, there are various consolidation methods available such as credit card balance transfers, home equity loans, personal loans, etc. For a credit card balance transfer, you need a good credit score. In terms of personal loans, now peer-to-peer lending online has become much popular.
What is the significance of debt consolidation refinancing?
Usually, debt consolidation refinancing is the inclusion of other debts by refinancing on your home. Say for example, if your credit card balance is $10,000 and there is a $90,000 home loan, then you can refinance you home for the higher amount of $100,000 and then transfer $10,000 to pay off the credit card debt. However, this is only possible if the market value of your home is higher than the mortgage balance.
Is it true that debt consolidation loans will adversely affect your credit score?
This is not fully true. Debt consolidation may be good for your credit score if you make payments on time. However, with the need for a debt consolidation loan, you may have already been falling behind on your payments so the credit scores may be naturally dinged. If you miss any further payments, then your credit scores may again suffer.
Which are the best debt consolidation loans?
This is a wise decision to make based on the amount owed and your repayment capacity. In general, we can say that credit card balance transfers may be the best type of consolidation of loans along with personal loans, home equity loans, etc.
Who may qualify for a debt consolidation loan?
Anyone having a fair credit score may qualify for the debt consolidation loans. On the other hand, if you have a poor credit rate, debt consolidation can still be available, but the interest rates may be higher.
You should do a primary assessment before applying to see whether debt consolidation is appropriate for you. An ideal debt consolidation loan will work in your favor to reduce the interest rates and monthly payments. However, consolidation will have no impact if you again live a free spending life with no restrictions on credit card usage.
Article by Anthony Travis, a doctoral fellow in economics, who used to write blogs and articles in public interest about various financial vehicles, debt consolidation, cash advances, loans, debt management etc.