Debt Consolidation means taking a new loan to pay off a number of existing debts, generally unsecured ones. In Debt consolidation, your multiple debts are combined into a single, large set of debt, usually with more comfortable payoff terms. Here in comfortable payoff terms include a lower interest rate or lower monthly payment.
Debtors can use debt consolidation as a tool to deal with credit card debt, student loan debt and many other types of debts.
There are two broad types of debt consolidation loans:
1. Secured loans are provided to the borrowers by keeping an asset as collateral like house, car etc.
2. Unsecured loans are issued to the borrowers as debt consolidation loans are not backed by assets and can be more difficult to obtain. They also tend to have higher interest rate and lower qualifying amounts.
Advantages of debt consolidation loans:
Debt consolidation loans are most helpful for people who are having the below things
1. Having multiple debts
2. Owing £10,000 or more
3. Receiving frequent calls or letter from collection agencies
4. Having the accounts with high-interest rates or monthly payments
5. Facing difficulty in making payments
6. Unable to negotiate lower interest rates on loans