Many people suffer from this misconception that debt consolidation loan is basically the concept of financial scams that people get involved in with the help of certain disreputable companies who provide the much needed assistance in these scams. These companies with bad repute usually trap unsuspecting consumers and restrict them in these scams because of their helplessness due to the financial crisis. However, not that such situations are false, but these traps and scams are not just involved with debt consolidation loan, but prevails everywhere. Hence, it is not right to associate the concept of debt consolidation loan only with these scams and fraud activities. So let us get more clarity on this and understand the importance of debt consolidation loans and what they actually talk about.
Debt consolidation loan at its very basic level is basically the accumulation of all small debts and loans together into one big debt loan. For instance, paying instalment for 3 small student loans makes no sense specially when you have to pay the instalments at different time of the month with a difference in the rates of interest. It gets very confusing and to make things simpler, you can always consolidate all the 3 small loans under one big bracket that even lowers the rate of interest. So it is just one payment in the entire month and that too with a small rate of interest and you are sorted for good. The entire process of debt consolidation carries with it the basic idea of making life simpler and taking care of your finances.
The truth is, there is no scam involved with a debt consolidation loan and in fact it is a legitimate way of managing your debt and taking care of your finances. When talking about the legitimate way of handling debt, the sovereign funding debt consolidation loan is one of the most important factors of handling finances.
Working of the Debt Consolidation Loan
There are multiple ways of handling your debt when you are dunked in a big pool of financial crisis. However, let us check the various types of debt consolidation programs that people can avail depending on the financial condition they are in.
- Standard Debt Consolidation Loan – This loan type involves you to avail the loan from a well reputed credit union or a bank or even a peer to peer lender who has fair chances of agreeing to consolidate all your debts under one big bracket to make it into one big loan. The only reason to consolidate all loans together is to make sure that the rate of interest is low in comparison to the rate of interest that you used to pay previously.
- Balance Transfer Offers – Credit card balance transfer is considered to be a type of debt consolidation loan since it involves the consolidation of your debt into a brand new credit card. There can be instances when you would come across 0% interest stretched on a period of 12 to 18 months in case of balance transfer offers which helps you to pay off your debt and get rid of this financial crisis for good. It is best to avail this loan only when you are confident about paying off the debt amount within the time span that has been pre decided while availing the offer. Failing to pay the debt amount can bring further financial complications that you would surely not want.
- Home Equity Loan – This option of debt consolidation is only available for people who already have an existing mortgage. Interestingly, it is one offer that people in the US are using a lot these days and this trend seems to be on the rise. This loan type indicates that you are planning to borrow money against the value of your home so that you can pay off your credit card debts. This loan type charges a less amount of interest rate but the risk involved here is that the inability to repay your lender might lead to foreclosure of your home.
- Student Loan Consolidation – There is a difference between a student loan consolidation and a standard loan consolidation and it is best not to get confused between the two distinctly different loan types. The difference being that in case of student loan, there are several instances when you might actually borrow from the federal government. This government offers a very low interest rate and provides a certain amount of flexibility during repayment considering it is a student loan. However, it is important to remember that a student loan debt is a lot more difficult to discharge through bankruptcy when compared to the other debt types. There can be instances when the government might also garnish your wages in case you default on your federal loans. So be very careful while opting for this loan.
These are some of the legitimate ways of handling debt consolidation loan when facing a crucial financial crisis.