Types of debt consolidation and definitions.
There are several different options available when it comes to debt consolidation. Some people use a low interest loan. Others maybe refer to it as settlement or elimination. There are other terms that are defined below as well. These are just a few of the many phrases and words that you may hear when researching and learning about types of debt consolidation.
If you research more about these various debt consolidation terms, get definitions of them, and learn what they mean, then you will be have a much better chance of reducing or even completely eliminating your debt, getting back on a solid financial footing, and becoming debt-free over the mid to long term.
Debt consolidation defined
First, we need to define exactly what is debt consolidation. This very broad term is used to describe any program in which you combine your various debts (including credit cards and medical) and/or bills into one new loan. This should have a lower interest rate, and it will also allow you to make just one monthly payment. This will make it much easier to pay off your debts as it the lower interest rate will lower your monthly charges and the one payment simplifies the process.
- Better organization and records - Consolidation of your accounts is combining all your credit card debt into one easy to manage payment. What this means is that you will receive just one bill every month instead of countless statements arriving at different times from numerous creditors and lenders. You will no longer need to track all the different repayment dates, fees, and such. With a large number of creditors and bills due at different times to keep track of each month, it can be easier to miss a payment and/or get a letter lost in the mail. Consolidation of debts reduces that risk.
- Lower monthly payment - The number one reason to consolidate your credit card accounts, and what needs to be your primary goal, is to reduce your monthly payments. In most cases, by consolidating your debt, the single monthly payment that you need to make will be lower than what you were paying previously on the accounts you had. By consolidating your bills and accounts with one lender, they will generally offer you a lower interest rate, which equates to lower monthly debt payment.
- Consolidation will reduce or stop debt collector calls - If you consolidate your bills with one lender, in effect you are paying off the debt owed to the previous lender(s). So that will stop harassing collection calls and notices from those creditors. Find other ways to stop debt collector calls.
- Improve your credit score by consolidating debts - Since consolidating your debts is done with the goal of helping you to start making your monthly payments on time again, your credit score and ratings will improve as making your payments on time is a positive. Of course this will only occur if you make future payments to a lender, bank or credit card company on time.
- Consolidation will eliminate debt quickly - Once you complete the process of consolidation, you may find that your debts will be paid off much more faster than before. This happens as a direct result of the lower interest rates you will be paying and the fact that more of your payment that will go towards principal. As a matter of fact, there are other ways to reduce debts, such as hardship programs, debt settlement, and more that be used at the same time as consolidation. Learn more on these methods of debt elimination.
In addition, it will offer you the means of eliminating late fees, miscellaneous charges, and other costs. It will also help you as the lower interest rate that you pay will save you on interest expense and a larger percentage of your payment will be able to go towards principal. Read a FAQ on debt consolidation.
What is unsecured debt? It is the type that does not have any collateral. Some of the most common types of this debt include hospital bills and credit cards. Any loans or debts that you have on possessions such as cars, houses, boats, motorcycles, or other physical items are not considered to be types of unsecured debts.
What are credit card assistance programs? A growing number of credit card issuers and banks are beginning to provide consumers with assistance programs to help them consolidate and get rid of credit card debt. Many are now realizing it is better to work with consumers to get some of their debt paid paid off rather than have the consumer declare bankruptcy in which case the credit card company will not receive any payments from the consumer.
What is a home equity loan? How is this debt consolidation? This is when a homeowner has a type of loan that is made possible by using the equity in the person’s home. A home equity loan can be used to pay off bills, help to reduce and pay down debt, or it can even be used to repair or improve a home. Also, it is possible that if you go ahead and make repairs, or more likely improvements to your home that increase your property’s value, you could even gain the benefit of lowering the interest rates you would have to pay on a home mortgage if you refinance it. A home equity loan can also be used as a form of debt consolidation, however you can expect to pay higher interest rates with each payment that you make on this type of loan.
Many have heard of debt reduction. What is it? This is a way for people with bad or borderline poor credit to get help and improve their financial footing. It allows them to make use of the various types debt reduction and consolidation techniques.
Debt reduction will typically involve the use of specialized services. For example, the credit counseling or company you use for this will usually operate by getting their clients to withhold certain debt and bill payments to some creditors for at least six months. This will allow the client time to accumulate the cash that is needed to negotiate new payment terms on the loan or debt. By using these types of services, the downside is that you are essentially destroying what remains of your credit rating and scores. The poor credit that will result from this form of debt reduction should relegate this option as being an extreme measure, and usually one of last resort. Find how to improve your credit.
What is the definition of debt settlement? This is a type of debt consolidation in which the decision of a creditor is to accept a percentage of the outstanding loans, bills, or debt that is owed to them if there is no possibility of full remittance.
What happens is that the creditor would rather settle for getting something from you verses having you go into bankruptcy or risk you not paying them anything. Debt settlement can be effectively used with unsecured loans such as a medical bills or credit cards, in which the creditor would settle for some 30 to 70% less than the actual balance that you owe them. This debt settlement tactic will also negatively impact your credit score since the accounts you have with the creditor will indicate that they were paid as agreed upon by a side deal, which basically means nonpayment to credit rating companies. Click here for more information on debt settlement.
Before you move forward, and as you conduct a search for debt assistance and ways to get help with paying debt, make sure that you are both very knowledgeable about the definitions and types of consolidation. Always be careful about the different options and companies. Before agreeing to using any third party company to help in the process, read the fine print of each agreement before signing up. Knowing the various types of debt consolidation terms can help you make sense of the numerous options and jargon, and it can also help you better equip yourself to find the best debt reduction solution for you.
What is a debt counselor? A debt counselor is a company or person that can help you through the consolidation process. They will help you contact your creditors, negotiate the terms, and do whatever it takes to provide you the tools you need to consolidate and reduce your debt. However, maybe most importantly, they can help you understand all of your different options and answer questions. Many also provide budgeting and credit repair services. More on debt counselors.
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