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What is Debt Consolidation?

Are you thinking about debt consolidation?  Are you a creditor trying to discover new ways to manage your debts and aged receivables?

This process can be difficult but, depending on your financial situation, may be essential to effectively continue to collect your debts while still being able to fund your business.

Well, one method of simplifying the debt recovery process for your benefit can be engaging in a debt consolidation process to consolidate your payables, while collecting your receivables.

In this article our collection agency for small business will discuss the basics of debt consolidation and how it can help you to pay off your debts more efficiently and overall improve your business finances.

What is Debt Consolidation?

So, what exactly is debt consolidation?

This is a common query as it is not the most common manner of handling debt and may be unknown to many that do not engage often in debts of any sort.

Debt consolidation is the process of combining all or some of your debts into a single loan or account. But how does this actually help me?

Well, debt consolidation can assist you in the paying back of your debts in a variety of ways, depending on what it is that you are looking for.

To make one thing absolutely clear, it cannot remove any of your debt from your name! It does have the ability to, however, assist in other ways instead.

For starters, the combination of payments may bring forward an opportunity for you to secure a lower interest rate for all debts included in the payment.

This can decrease the overall amount you will pay on these debts over the years and help you to effectively rebuild and remodel your finances.

Furthermore, it can also help simplify debt payments for you! How many of us have been in a situation in which you have several debt payments due at different points of the month and you simply cannot keep track?

Well, this can be an issue of the past as debt consolidation requires one payment at one time of the month!

How does Debt Consolidation Work?

You may be wondering, how exactly does debt consolidation work? It almost seems too good to be true in its efficiency, so how can these payments be managed?

Well, when you consolidate your debt, you initiate a new credit line or simply take out a loan to pay off debts now.

This may sound a little backwards. Why would I put myself in new debt simply to pay off old ones?

Well, aside from the benefits previously discussed, debt consolidation can help you save money in a variety of ways.

It generally is reliant on the interest rate or the amount of time you will need to pay off debts as to whether it would help you.

Types of Debt Consolidation

Due to the fact that there are several types of debt, you can consolidate, there are also inherently several types of means to consolidate them.

The method you choose should be considered quite in-depth and this decision should not be made lightly to avoid future financial issues, such as poor cash flow or credit score.

It should also depend, of course, on the debts you wish to consolidate. This being said, these are some of the types of debt consolidation you have to choose from:

  1. Debt Consolidation Loan
  2. Credit Card Consolidation
  3. Student Loan Consolidation
  4. Home Equity Loan
  5. Cash-Out Mortgage Refinance

We will briefly explain these in more detail below.

Debt Consolidation Loan

One way you may wish to consolidate your debts is by using a debt consolidation loan.

A debt consolidation loan, as discussed prior in the article, is simply taking out a loan to pay off some or all of your current debts.

This method is used to decrease interest rates of payments, which will, in turn, lower the overall amount of money you spend paying off debts.

Credit Card Consolidation

Credit card consolidation, or a credit card balance transfer, is the process of transferring all of your current credit card balances to a new card that you have obtained.

This type of debt consolidation again serves the purpose of simplifying the debt repayment process so you will only be required to make a single payment, rather than remembering to make various.

When considering a credit card balance transfer, ensure that you take into account interest rates, balance transfer fees, deadlines, and penalties if payments are missed.

Student Loan Consolidation

Student loan consolidation is the process of combining the various student loans you may have into a single payment. This loan will be supported by a government body.

This method can benefit the student not only by reducing and simplifying the number of payments required to be made but may allow an opportunity to utilise borrower protections.

Home Equity Loan

Another way to consolidate debt is using a home equity loan.

This method involves taking out a loan, secured by the equity of your home, to pay off some or all of your debts.

This method, like all of the above, does come with its risks though.

For example, failure to make payments on the loan may result in the bank/lender taking your home, as you agreed to collateralise it for the funds received.

However, aside from this risk, a loan of this sort may have significantly lower interest rates. 

Cash-Out Mortgage Refinance

A cash-out mortgage refinance may be the right fit for you when looking to consolidate some of your debts.

A cash-out mortgage refinance is the process of refinancing a mortgage by a borrower for more than the debt outstanding on it.

The borrower may then take out the remainder in cash to pay any other debts off.

Any other debts remaining can then be combined into the one mortgage payment for added benefits aforementioned.

Key Takeaways

Debt repayment can be complicated.

Between all of the payments and timelines you have to keep track of, it can quickly become too much to handle! If you are in this boat, debt consolidation may be an option to start considering.

Not only does this process make the hassle of debt repayments so much easier but it also allows the opportunity for you to customise other payment terms, such as interest rates, to suit you better.

However, it is important to do your own individual research and, if necessary, seek professional advice to ensure this process is right for you!

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