Debt consolidation is actually used for taking one single new loan or debt against multiple loans or debts. Generally, this new loan is used for financing your multiple non-asset debts like student loan, credit card bills, medical expenses, etc.
How Does Debt Consolidation LoanWork?
As mentioned above, a debt consolidation loan is a new loan that’s taken for repaying other existing loans. There is a single creditor in debt consolidation loan. You have to pay a single creditor every month for this loan, which the creditor is going to take care of your other debts for the entire month.
In debt consolidation, a new credit with interest rate is paid to the creditor just like other debts. You can easily cover your rent payments, credit card payments, utility or medical bills by the debt consolidation loan.
Types of Debt Consolidation Loan
Debt Consolidation through Secured Loans
The advantage of opting for one secured debt consolidation is that you have to pay less interest rate on the loan amount. Because this is the secured loan, it reduces the risk associated with the loan. This further makes this loan more affordable and you also get benefits in the form of tax deductions.
Debt Consolidation through Unsecured Loans
It is another good option for taking a debt consolidation if you don’t have any security or collateral for pledging. Certain banks offer unsecured debt consolidation at a low-interest rate. But you need to be careful when choosing a bank, as you need to find the one offering low-interest rate for an unsecured loan. The benefit of this type of debt consolidation loan is that your collateral won’t be at risk.
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