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How Do Debt Consolidation Loans Work?

Most people are panicking about how to stay alive and many are living hand to mouth in the current times, let alone wondering how to pay the next doctor’s bill or clear their overdraft at the bank. A debt consolidation loan combines it all, taking credit cards, accounts, medical bills and other debts and consolidating them into one complete loan. But does debt consolidation really help to reduce the cost of paying off your debt and lowering the interest on your credit card debt?  Here is how it works.

Types of Debt Consolidation Loans

A Home Equity Loan (HEL) is a loan against your fixed asset, namely your house, which is used as collateral or you could apply for an unsecured personal loan from a bank or you could opt for a balance transfer of credit cards which is also usually offered by the bank, whereby all debt is moved to one single credit card account. Important to bear in mind is that your chances of getting any of these loans is lowered when you are already ‘in trouble’ so, the best move is to anticipate future outcomes and strategize before it is too late.

Debt Consolidation Benefits

Researching a debt consolidation loan at Freedom Debt Relief, you’ll find a huge benefit of debt consolidation is having a specific end date, which helps with budget planning and gives you a clear picture of the direction you are going. Moreover, when your debts are properly consolidated, you will pay a lower interest rate and you’ll pay one institution instead of multiple creditors.

Consolidation vs. Settlement

Debt consolidation and debt settlement are sometimes spoken of as if they are the same thing. However, there are some key differences. With debt consolidation the debtor enters into a completely new loan in order to pay off their debt, whereas debt settlement is a situation where the person hires the services of a third-party company that will contact your creditors and offer them a one-time payment in full of the money you owe in exchange for certain concessions. 

Meanwhile, debt consolidation involves no communication with your lenders at all, save to pay them off with the proceeds of the new loan.

As you might imagine, not all creditors would be happy with this arrangement, as it would mean writing off a substantial amount of your debt. It also entails forfeiting the maximum amount they might have made off you in interest payments. However, many experienced creditors consider accepting a settlement agreement better than getting nothing at all, which is what could happen if they forced you into bankruptcy court. 

Ultimately, if you are thinking about consolidating your debts and streamlining your financial path for the forthcoming five to seven years (this is the minimum average time it usually takes to see the light at the end of the tunnel), you’d be better off taking the safest route of a loan to merge your obligations into one financial instrument. This will make it much easier  to settle all the arrears at the various creditors, which, in turn, will give you room to breathe and work out the next steps. 

Keep in mind though, all of this is of course assuming a consolidation would work in your favor. Remember the numbers have to line up for a consolidation to make sense for you; otherwise, you’ll just dig a deeper hole for yourself. 

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