What is Debt Consolidation and What Are Your Options?

For most people, efficient debt management is generally a highly complicated and frustrating task. Keeping track of different accounts, payment amounts and due dates can often make the borrowers feel constantly stressed and impact their physical, emotional and mental well-being quite significantly. More importantly, managing multiple debts can create serious cash flow problems, further complicating the financial situation of borrowers. The situation is even more complicated for people dealing with long term unsecured loans as compared to those trying to pay off short term personal loans. One way to reduce the stress of managing multiple loans is through the process of debt consolidation.

A Brief Overview Of Debt Consolidation

Debt consolidation can be defined as a framework that offers multiple options to the borrowers to address their existing debt load. It is based on combining multiple unsecured debts into a single loan, which can then be paid off gradually through a single monthly payment. Opting for this method of debt management offers multiple benefits to borrowers, besides enabling them to lead a stress-free life. Rolling multiple debts into one helps in reducing the overall interest rate, paying off various debt accumulations on time and restoring the financial stability of borrowers to some extent. However, in order to get the best benefits of debt consolidation, it is important for the debtors to be aware of various options for the same available to them.

Balance Transfer Credit Card

Most credit card service providers offer the facility of balance transfer cards to help their customers consolidate their multiple debts. These cards generally come with a credit limit that is high enough to cover the pending payments of existing loans. Moreover, they have an annual percentage rate that is low enough to be affordable for the debtors without adding to their financial woes. In most cases, these cards are offered with an introductory  0% interest rate for a period ranging from 12 to 18 months. This can prove to be extremely beneficial for the applicants as they can save a considerable amount of interest by paying off the balance before the expiry of the introductory rate offer.  

Low-Interest Personal Loan

Another effective method of debt consolidation is for borrowers to avail a low-interest personal loan. The loan amount is used to pay off current debts, which is why the loan is also known as a debt consolidation loan. Such loans are often unsecured, which means that the applicants do not need to provide any collateral for getting these loans. Moreover, a majority of personal loans have fixed interest rates, which are generally lower than the interest rates for credit cards. Moreover, the repayment terms are generally quite simple and make it easier for the debtors to follow a fixed monthly payment schedule which is well within their budget range.

Home Equity Loan

A home equity loan is the line of credit that can be availed by the debtors whose appraised value for their home is significantly higher than their balance mortgage amount. This loan is offered at relatively lower interest rates and also provides a greater amount than personal or credit card loans. These loans come with a fixed rate and fixed monthly payments making budgeting easier. Moreover, the repayment time generally ranges from 5 to 30 years, which provides the debtors with enough time to pay back the amount comfortably. This is a secured loan by the very nature of its implementation and hence is somewhat riskier.

Debt Management Plan

A debt management plan is the best option for people who are not too keen about taking yet another loan or applying for a balance transfer credit card. A debt management plan requires the debtors to seek assistance and counselling from a non-profit credit counselling agency. The agencies negotiate with the creditors on behalf of the debtors and work out a loan payoff plan keeping the current financial situation of the clients in mind. The debtors close all their credit accounts and instead start paying a single monthly instalment to the agency, which in turn pays the creditors.