Debt consolidation is the act of taking up a loan to pay off a previous loan or several other loans. It is a form of refinancing and relieving off heavy financial burden caused by frequent installments that need to be paid off.
Debt consolidation is of great benefit, in the United States,existing student’s loans are purchased by the department of education, this allows one to presently pay the student loan at the interest rates at which loan was acquired. If a student has several loans at different interest rates, then a weighted average of the then interest rate is used to determine the exact rate. Debt consolidation allows for re-negotiation of terms of payment, one can extend the repayment period and pay lower monthly installments. This reduced the financial strain caused by large installments.
Debt consolidation can lead to lower interest rate, in the U.S. secured loan attract lower interest rate than unsecured loan. Settling an unsecured loan with a secured loan means that one is likely to pay less installments compared to the previous loan. Loans are secured using tangible assets such as title deeds and log books.
Debt consolidation reduces the probability of defaulting a loan and attracting charges on late payments. This is because one will no longer pay several loans. This improves the credit score and probability of obtaining a loan in future. For business owners, debt consolidation allows one to receive funds for expanding their business. One can obtain a loan of $6000 to offset a loan of $5000 and use the extra funds for the business.<br>Debt consolidation creates awareness about ones debt condition and helps in managing and planning of debt. Most Americans do not keep tract of exactly how much debt they have especially on their credit cards. Consolidating these debts help one to determine exactly how much they owe and create a repayment plan.