What is Debt Consolidation?

What is Debt Consolidation?

Debt consolidation is the rolling over of high interest debt (like credit card bills) to a lower interest payment loan with a single payment. Pursuing debt consolidation can help you to lower the total amount of debt you have to repay and to better organize it to pay it down quicker. 

Two main types of debt consolidation help you to reorganize your debt. You could apply for a debt consolidation loan at a fixed interest rate. When you get this money, you then utilize it to pay your other debts off. You pay the debt consolidation loan for a set term in monthly instalments. 

The other primary method is with a zero percent or low interest balance transfer offer from a credit card. These offers permit you to transfer your other credit card bills onto the card and then pay off your balance (preferably within the promotional period).

If you own a house, you might also consider taking a home equity loan for debt consolidation purposes. The risk of this is that it puts your home in danger if you are unable to repay the loan. Your best option with debt consolidation comes down to your credit history and score, alongside your personal debt to income ratio. 

In order to be successful with debt consolidation, you need several things. Your aggregate debt (not counting mortgage debt) should not be higher than 40 percent of your gross income. You also need sufficiently good credit to be approved for a debt consolidation loan at a low interest rate or for a zero percent credit card balance transfer offer. It is essential that you have enough cash flow to continuously service your debt. 

Finally, you should make a plan to not incur a large amount of debt for the future.

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