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The Pros and Cons of Debt Consolidation as Your Major Options

If you want to pay off all other debts that you currently have you can consider debt consolidation which typically is a special type of debt refinancing. In general, debt consolidation involves rolling multiple unsecured debts into one single bill.

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If you want to pay off all other debts that you currently have you can consider debt consolidation which typically is a special type of debt refinancing. In general, debt consolidation involves rolling multiple unsecured debts into one single bill. These unsecured loans may include:

·         Credit card debts

·         Personal loans

·         Medical bills and others that you can pay off with one loan.

There are more than one ways to go about consolidating debt. A few of these include:

·         Transferring the debt to a new low or zero interest credit card account

·         Taking out a new debt consolidation loan

·         Applying for a home equity loan

·         Paying back your debt through a debt repayment consolidation plan or others.

When you research about all available consolidation plan options, you will come across several debt consolidation companies. Some of these companies may be reputable and legitimate but according to Consumer Financial Protection Bureau there are other companies that can be unbelievably risky, especially those companies that doubles as debt consolidation as well as debt settlement companies.

This is because some of these debt settlement companies will follow the usual practice of convincing you to stop making payments to your creditors and instead deposit a monthly amount in a trusted account. This is done with two specific intents:

·         One, to create a fund to make an offer to the creditor during debt settlement negotiation and

·         Two, to increase the chances of your creditors accepting your offer as they might fear they will lose the entire amount due to nonpayment.

The CFPB warns people following this approach because it will have a few drastic effects and all of it is legal. These consequences are:

·         It will affect your credit score and report

·         Your account may be still pursued for collection and even handed over to the debt collection agency and

·         The creditors have the legal right to file a formal lawsuit to recover their dues.

In case the creditors win the judgment before you settle the debt with them and make the lump sum or at least the first of the part payment, they also have the right to garnish your wages to enforce the judgment.

Therefore, experts suggest that if you are seriously considering debt settlement as your option, you better try to get in touch and speak with a nonprofit credit counselor first. This will prevent you from putting your credit in jeopardy due to debt settlement.

Choose a debt consolidation method

On the other hand, if you choose a debt consolidation loan, you will be saved from such hassles. This is a significant advantage of this specific debt relief and management program.

Once you choose a debt consolidation method, you will find that this option is far better than debt settlement and will help you in several different ways such as:

·         It will keep the total cost as low as it is possible

·         It will reduce your debt management hassles as you will have only one bill and one creator to repay

·         It will reduce your monthly payments due to low rate of interest

·         It will provide you with enough respite and breather due to the extended time you will get to repay it.

However, you should not try to extend the term too muchto pay off your new loan because the longer is the time, more you will pay the creditor eventually even if the rate of interest is low.

It is like paying $100 every month for three years and the same amount for five years every month. In the first case you will pay $3,600 and in the second you will pay $6,000 for the same amount borrowed at the same rate of interest with the only difference in the loan tenure. It is all simple math and common since.

·         Therefore, the best way to make the most out of your debt consolidation loan is to come up with a plan to repay the debt in three to five years.

·         You will also need to read the fine print of the loan contract so as to make sure that all surprise costs and fees such as application fees and balance transfer fees are either avoided or made clear to you before borrowing the money from the creditor.

Remember, any offer, whether it is for debt settlement or for debt consolidation, that sounds too good to be true, probably is.

Common types of debts consolidated

The terms and conditions of a debt consolidation loan will vary according to the lending source and also the type of loan you want to consolidate. As for the source, a debt consolidation loan is typically offered by traditional banks and financial organizations. Several other online sources such as Libertylending.com and others may also provide you with some valuable tips and advice for debt management along with it.

When it comes to the type of debts that you can consolidate with such a loan it includes several different types of consumer debts. However, the most common debts are:

·         Credit card debts

·         Medical debts

·         Few specific student loans

·         Personal loans and

·         Specific auto loans.

Typically, most people use this debt consolidation loan to pay off the unsecured debts. These are the debts that do not require any collateral.

Secured debt and secured loans on the other hand are often left as it is because these have the collateral in the form of a car or a home that can be utilized by the creditor in case of nonpayment.

There are other different types and not so common types of loans that you may have currently.  One such is the fixed interest rate debt such as mortgages in which same interest rate is set and it continues throughout the life of the loan. There is also a variable interest rate debt such as credit cards where the interest changes at some point or the other throughout the duration of the loan.

You should consult a credit advisor to know more about the types of debts you can consolidate since. They can help you make the best choice and plan to achieve debt consolidation success.