Falling into the trap of unmanageable debt is a very common situation nowadays. It is a proven fact that more than 45% of people in the US spend more than what they earn. Climbing out of the trap of debt could be a very complicated process without using any proper procedure. A debt consolidation plan is the real savior, because it can actually bring you out of the situation and help you pay off/clear your multiple loans at the same time.
What Is Debt Consolidation
Generally, you can find there are two types of debts but each of them has different sub types included. The objective is to secure a loan with a fixed interest rate or lesser interest rate to pay them off. Following are several types of loans.
Personal Loan – This type of loan is offered for a specific amount of money. A personal loan is given for a declared and undeclared usage. This type of loan is processed through a bank or another financial lending institute. Secured loans are given to anyone against property or a guarantor, but unsecured loans are only provided to the consumers with a high credit rating.
Mortgage Loan – It is a long term loan issued specifically for purchasing personal or commercial property. As a customer, here you might negotiate to lower the monthly payment.
Educational Loan – This type of loan is particularly designed for educational purposes only, for paying educational bills, meal plans, tuition fees and other living expenses for college or university. This type of loan is paid after completing the course. With this type of loan you can ask for an additional grace period. These are the typical traditional loans and the second type of debt is revolving credit.
Unlike traditional loans, revolving credit allows you to borrow the same amount of money again after paying the loan amount. There are mainly two types of revolving credit you can find in the market: Credit Card and Line of Credit.
Credit Card – Today we all use plastic money. The credit card has become the most common form of personal debt. According to latest surveys, it is said that almost each American has more than five credit cards on average.
Line of Credit – Generally, a line of credit is issued by banks and other financial organizations. It provides a reusable source of funds, and you can withdraw it by check or cash.
As we mentioned here earlier, one of the most practical ways to pay off insurmountable debt is nothing but debt consolidation. Usually there are two types of debt consolidation but it comes in one of two forms- Home Equity Loan and Negotiated Debt Settlement
Forms of Debt Consolidation
Home Equity Loan – This is one of the most effective debt consolidation solutions for mortgage customers, because it allows a customer to refinance their mortgage. The customer can use the equity amount that he built up as a loan guarantee and use it to pay off the higher interest loans and credit card loans.
With the help of this home equity loan, homeowners pay one single payment per month which is less than the total combined monthly loan amount of all the outstanding loans.
Negotiated Debt Settlement – This type includes the involvement of a third party service which is specialized in debt consolidation. Usually the third party will contact each of the creditors personally on your behalf and will negotiate an amount you have to pay every month. The advantage of this sort of settlement is that the negotiated amount will always be less than the actual loan amount. All you do is pay the money to the third party and they will make the payment to each of the creditors.
Getting into an appropriate debt consolidation plan will benefit the consumer in a big way, but a bad consolidation plan can lead to total disaster. It is essential to gain good knowledge about what a debt consolidation plan has to offer. As a consumer you may not be so sure about the guidelines of a good debt consolidation plan, so seeking professional advice can help in a major way.
Written by Phyllis Espinoza. Brought to you by ArticleBiz.