Debt Consolidation

What is debt consolidation?

Debt consolidation is the process of replacing several loans with a single loan usually with lower monthly payments and longer repayment period. When you consolidate debts, you effectively replace several monthly payments with only one. This means that you will not be likely to miss or forget paying the monthly payments and therefore avoid being penalized. In addition to that, the monthly payments are greatly reduced since you will be paying just one long term loan. Debt consolidation loans are used for various purposes such as purchasing cars, clearing credit card bills, paying medical bills, home improvement among other purposes.

To start a debt consolidation process, you need to first of all do a research on several credit counseling agencies. The agencies offer debt consolidation educational services. Moreover, they negotiate for reasonable monthly payments with the creditors. Other services offered by the agencies include: budgeting, paying bills on time, and other financial issues that can help a person to learn how to manage their money. Some of the debts which can be consolidated include credit card debts, store cards, unsecured short term loans and car loans. In south Africa the interest rate on these loans can range from 9% to 64%, making it necessary to consider debt consolidation.

After knowing what is debt consolidation, you should know the several reasons why debt consolidation might be the best option for you. First, if you have bad credit card debt that have become overwhelming to you, then debt consolidation might be a good option for you. It is also advisable to do debt consolidation if you have difficulties in paying basic bills due to bad debt. Other reasons might include: many outstanding store card bills, when you want to buy a new home or property.

What is unsecured debt consolidation?

Unsecured debt consolidation is a type of debt consolidation whereby a person is granted a loan without putting up a collateral. Since this type of loan has higher risks associated with it, many financial institutions place higher interest rates than the secured ones. In addition to that, many banks tend to give out large sum of money for unsecured debt consolidation loans.

However, this type of debt consolidation benefits the borrowers in that, they are not at risk of losing their properties through auction or foreclosure. Here, the borrower has the privilege of renegotiating the repayment with the creditor, if he fails to pay the monthly payments. It is important to note that, although such privileges are available to the borrower, that does not guarantee the borrower to default as he or she wishes. Some lenders may go all the way to suing you in case you default. Another benefit of unsecured debt consolidation is that, the loans tend to have a fast approval rate since there are no property valuation processes involved.

What is secured debt consolidation?

Secured debt consolidation is a type of debt consolidation using a loan that is secured by an asset. Some of the collaterals used in secured debt consolidation may include: real estates, cars, stocks, bonds and personal belongings. This loans are usually the best options for people with bad credits, who cannot qualify for unsecured debt consolidation loans. It is more likely that, the more valuable your collateral is, the more money you get for your secured debt consolidation. In south Africa, the current market value of the collateral must exceed the total amount of loan inclusive of interests.

The interest rates of a secured debt consolidation loans are usually lower than the unsecured ones due to the collateral that a financial institution gets from you. The other benefit of using secured debt consolidation loan is that, people with bad credits are eligible for these loans. Therefore they can still use the loans to consolidate all unpaid debts into a single manageable loan.Another benefit of secured debt consolidation program is that you can set the time limit to repay the loan off. This is of course done through negotiation with the lender. If you set a wider repayment period, you will have lower monthly payments although you will have contributed a higher value than if you had set a less repayment period. Getting a secured debt consolidation loan is also very easier than unsecured one. This is because of the many financial institutions that are willing to lend secured loans to consolidate debts.

To choose the right debt consolidation loan, you should first of all shop around with several financial institutions to know the institution that is offering the least interest rate. While at this you should also check the institution’s profile and service background. Before you sign for any debt consolidation loan, you should know all costs associated with such an action. You should also make sure you check the terms and condition before signing up the debt consolidation program. It is also very important to calculate the interest rates and charges of your debts, and compare the results with the total cost of the debt consolidation loan.

It is worth noting that even with debt consolidation, the debts will still remain. All you will have done is to extend the repayment period and lower the monthly payments. Therefore, to recognize the benefits of debt consolidation it is advisable that you have discipline in your money spending. To do this, you should avoid using credit cards at all cost. In addition to that, you should also budget for your income, thereby; you will be able to plan the way you spend your money. Setting some money aside for saving, will also go a long way when you consolidate your debts. The savings can be used during emergencies or investing in some good income projects in future. This will help you not have many debts in future.

It is also important to decide the type of debt consolidation loan to apply, whether secured or unsecured. Know the risks associated with each type and conclude the best type that suits your circumstance. You should also get prepared to discuss your financial circumstance with your debt counselor or lawyer. You need to explain all the details concerning your debt situation and your income sources that will determine your financial affordability. This will be very useful when he or she negotiates for debt consolidation package for you with the lender.