When it comes to paying off debt, there are many strategies you can follow. You can come up with a plan to repay your debts, hire a settlement company to lower your overall debt, or adopt a strategy known as debt consolidation. You may have heard of the term already, but how exactly does this strategy work?
What is debt consolidation?
Debt consolidation is a strategy that consists of gathering all of your debts under one main loan. To put it simply, if you have more than one loan and you want to avoid paying a lot of interest on each one of them, you can make a new loan that will serve to pay off all your previous ones.
The main purpose of a debt consolidation loan is to secure a lower interest rate, so that is what you should look for first. Another benefit of this strategy is not having to keep track of all the different loans you have. In fact, this strategy only makes sense when you already have several different loans.
When choosing what type of loan to make for your debt consolidation strategy, you have several options: a personal unsecured loan, a secured loan, or a P2P loan.
What type of debt can I pay with a debt consolidation loan?
A debt consolidation loan can be used to pay off unsecured loans. These types of loans are not secured by a property or collateral that work as a guarantee for your debt repayment. Some examples of unsecured debt can be:
- Student loans
- Credit card debt
- Medical bills
- Personal loans
- Payday loans
A secured debt, on the other hand, is tied to an asset. One example of a secured debt is a mortgage.
Things to pay attention to when taking a debt consolidation loan
As mentioned earlier, the main purpose of a debt consolidation loan is to save money from interests so pay attention to the interest rate. This will vary depending on the institution that makes the loan as well as your credit score.
Furthermore, you’ll need to pay attention to the fees you’ll pay. Sometimes these will be mentioned separately while other times they will be included in the interest rate so make sure to get informed.
Finally, if you want to have some level of flexibility as to when you pay off your debt, avoid loans that have prepayment penalties. This is a fee that you’ll need to pay in case you pay off your loan early.