The debt consolidation saves you from default and eventually from bankruptcy or a foreclosure. So, certainly, this is a very much effective and needed financial product for the people who are getting drowned into a severe amount of debts.
Nevertheless, even if this kind of financial products turns out to be a blessing for the defaulters, there are still some matters which are needed to be taken under consideration. And on those matters, you will need to be very careful. So, here the discussion continues over these matters on which you will need to be very careful while performing the procedure:
- The Difference Between Insolvency and Bankruptcy
- Free PayPal Money : 14+ Tricks to Get Free PayPal Cash Instantly
What Is Debt Consolidation?
Debt consolidation refers to the act of taking out a new loan to pay off other liabilities and consumer debts. If you’ve got lots of different debts and you’re struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments.Debt consolidation can be used as a tool to deal with student loan debt, credit card debt, and other liabilities.
There are two types of debt consolidation loan:
- Secured – where the amount you’ve borrowed is secured against an asset, usually your home. If you miss repayments, you could lose your home.
- Unsecured – where the loan is not secured against your home or other assets.
How Debt Consolidation Works?
Debt consolidation is the process of using different forms of financing to pay off other debts and liabilities. If you are saddled with different kinds of debt, you can apply for a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new debt until it is paid off in full.
Most people apply through their bank, credit union, or credit card company for a debt consolidation loan as their first step. It’s a good place to start, especially if you have a great relationship and payment history with your institution. If you’re turned down, try exploring private mortgage companies or lenders.
Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions such as banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the general public.
Debt settlement vs. debt consolidation
An important point to note is that debt consolidation loans don’t erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan. For actual debt relief or for those who don’t qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.
Debt settlement aims to reduce a consumer’s obligations rather than the number of creditors. Consumers can work with debt-relief organizations or credit counseling services. These organizations do not make actual loans but try to renegotiate the borrower’s current debts with creditors.
Why you will need to be careful with the debt consolidation procedure:
The debt consolidation is a very helpful program in all respects possible when you have no other options rather than becoming a bankrupt. Yet, some negative aspects might lead you towards hassle. So, get to know about these and avoid these for your own sake:
Using the money for the reason it had been taken:
The consolidation procedure actually lets you avail bucks which are needed for you to pay off the debts you have. So, certainly, you will get the money to pay off the debts. But, if you use the grants for any other reason and leave the debt payment in a side, you will just add another loan in your huge debt list. This is certainly not an expected scenario for you.
Rather, you would make the situation even worse than it was before you applied for the consolidation program. That is the reason; you will need to be very careful about the use of the money. You should not let the grants be used in any other area apart from the debt payment. Otherwise, the money and the financial product would turn into a useless stuff!
Credit card start up:
The consolidation money comes to the bank account of the debtors. And in most cases, the consolidation applicants possess a credit card which is out of service for the lack of payment. In such cases, the credit cards get automatically paid off when it gets money in your account. This is certainly a dangerous thing for you as the money you need to pay off the debts would get reduced in this procedure.
So, you should provide the bank account which has got no debts and you can use the grants in the way you want to. The carelessness in this regard can also ruin your plan to pay off the debts perfectly.
You might dream of improving the credit rating with the consolidation program. And out of this dream you might perform some default. But, the fact is, the consolidation program helps you saving the credit reduction. But, this is not capable of improving the credit to a greater extent.
So, if you perform default, you would find your credit got declined even though you paid off the debts perfectly with the consolidation. So, you must not expect a greater improvement in your credit.