What are debt consolidation loans?

Consolidation of loans means taking out a loan with the intent of paying off other debts and liabilities. As the name suggests, multiple debts are consolidated into one singular debt usually with terms that are more favorable such as; more extended repayment period and low-interest rates.

There are quite some options available for people willing to merge their loans into one single payment but have the question of how do consolidation loans work? One example of a consolidation loan is the purchase of a new credit card to cover previous credit cards. Especially one with lower interest rates or a brief grace period. Another use of a consolidation loan is utilizing a new credit card’s balance transfer features to cover past unpaid debts.

Among the most notable reason to take out a consolidation credit facility is the need to manage personal debts and manage your finances by cutting down on the amount of money spent paying multiple loans. Some people would opt for a loans direct review system. There are many credit and debit facilities available, but it is better to consider debt consolidation as an option.

“How do consolidation loans work?” you ask. When you consolidate multiple loans, you eliminate the possibility of missing some of the payments as it is experienced with various loans, each with different repayment schedules and installments. And with the consolidated loan, you enjoy lower interest rates than the average of all the merged loans. While you make the decision, here are four main types of loan consolidation options that may help to answer your question;

  • Debt consolidation through a company – this kind of merger is offered as a service by lenders such as banks and credit unions. These debt consolidation services vary and thus, you must exercise caution before choosing. The consolidation companies offer lower interest However, the repayment period is longer.
  • HELOC (Home Equity Line of Equity Loan) consolidation – this type of consolidation loan is one that is taken out with the equity of your house as collateral. To qualify for this kind of loan, you have to have adequate capital and a favorable credit score. The interest rates are considerably lower, but the drawback is that your home is at risk of foreclosure if you default on loan payments.
  • Debt consolidation through a balance transfer – this type of loan allows you to consolidate all your credit balances onto one card with a higher limit and lower interest rates, which are usually promotional. Therefore, always know how long the promotion period lasts before choosing this type of loan. The downside is that your credit rating will take a hit when you are unable to pay the credit card company.
  • Peer to peer or P2P consolidation – this is a new type of consolidation that provides a cheaper option through P2P lending institutions. The primary purpose is to link you with people with the means to invest and help you consolidate your debts. The investor benefits from the low interest charged, more economical than other lenders, on loan and the satisfaction of helping people in need of financial assistance.

Advantages and shortcomings of direct loans consolidation

Debt consolidation is a helpful service for borrowers who want to consolidate government loans into one direct consolidation loan. You may ask yourself what are direct student loans? Direct loans are state programs designed to provide loans of low interest to post-secondary school students.

While the prospect of a direct loans student is alluring, it is not a fix-all solution. This is the case because not all loans are eligible and it is not an advisable strategy to depend upon. Always take time to evaluate the benefits to be had and the potential shortcomings of consolidating direct loans before you make a decision.

shortcomings of direct loans consolidation

How the consolidation of federal student loans works

To efficiently create a repayment policy that represents the consolidation of federal student loans, you must take into account the pros and cons of consolidation loans. You may be overwhelmed with your outstanding student debt and are wondering whether it is the right choice to consolidate your debt or refinance it yourself.

If you are wondering, how do I consolidate my loans? There are two ways you can; they include student loan refinancing and federal student loan consolidation. Loan refinancing also called private loan consolidation that involves the use of a private lender to clear your outstanding loans. On the other hand, federal consolidated student loans encompass the state mechanisms you use to merge your unpaid student loans.

The table below may help illuminate the best decision;

When applying for a consolidation, a benefit of direct and subsidized loans boast compared to other types is that it would only take less than half an hour online. The process requires you provide details about your outstanding federal student loans then you choose a feasible loan servicer and repayment plan. The application has to be completed in one sitting on the direct loans us department of education website. Therefore you should have done your research before you start the process.