What Are the Best Types of Debt Consolidation?

Personal Finance

It is challenging to get out of debt. It is tough if there are many creditors. If a person is trying to juggle all such things, then debt consolidation is the right option. The meaning of debt consolidation is to combine many debts into one payment. There are many methods for this. This makes the finances of a person simple. One has peace of mind as they do not need to juggle many payments. This also helps to save up money in terms of interest. It helps to pay off debts faster. 

How does debt consolidation work?

Many forms of financing are used to pay off many liabilities and debts, and it is known as debt consolidation. It can be so that person is swaddled with many obligations. To ease the situation, a loan can be applied to consolidate the debts. It would result in a single liability, and the rest gets paid off. Then the payments are to be made on the latest debt till it gets paid. 

Many people like to choose their banks, credit card companies and credit unions for this purpose. It is an excellent way to start. It would be great if the person had a good relationship with the financing institution. If such an option turns down the application of a person, they can check out private financing companies for debt consolidation.

Creditors have several interests in giving this benefit. Due to debt consolidation, the likelihood of collecting for debtors increases. The general public gets this service from banks or credit unions. But many private agencies and lenders are willing to offer this option. 

What is the difference between debt settlement and debt consolidation?

It is essential to know that debt consolidation does not mean the original debt gets erased. It simply means that many loans get transferred to a different lender or kind of loan. There are many whose loan needs to be qualified. They can try for debt settlement. The purpose of debt settlement is to lessen the obligations rather than no. of creditors. A person can decide to work with a credit counselling service or debt-relief organization. The purpose of these organizations is not to create new loans. Instead, they try to negotiate the existing loan with the creditors. 

What are the different types of debt consolidation?

  1. Balance transfer credit card: 

This method of debt consolidation has a low or even zero interest rate for the initial 18 months. In this, the balances from a high-interest credit card are moved to a new one. The goal is to pay the balance before the end of the promotional APR period. Otherwise, one gets racked up in more interest than they started with. One needs a balance transfer card that has high accommodation for the balance being rolled over. It also needs to have a low APR (Annual Percentage Rate) to make it worthwhile. One can use an online calculator to see how much time one would need to repay the balance. 

  1. HELOC: Home Equity Line of Credit:

The difference between the appraised value of the home and how much a person owns on their mortgage is called home equity. For debt consolidation, a homeowner with a good credit score and equity can borrow some of the equity affordably. Many people use this credit to pay high-interest debt like credit cards. HELOC acts as a second mortgage. It means that an additional monthly payment gets added. It gives a credit line that lets one draw from a variable rate. This can be a good option if one has enough equity to be qualified. 

  1. Loan for debt consolidation:

If one gets qualified for a low-interest rate, then a loan for debt consolidation is a great option. One gets enough funds to cover their debts and a comfortable repayment term. This loan is an unsecured one. So, the rate and limit of borrowing depend on the person’s credit profile. One can use either the entire or a portion of the loan to repay the balance. So, a person needs to make only a few payments monthly. Instead, they need to make only one payment on that personal loan

  1. Peer-to-peer (P2P) loan:

This option of debt consolidation connects investors with borrowers. They offer them an unsecured loan. As this is an unsecured loan, the person’s credit history is quite important. It is needed for fees, borrowing limits and rates. The higher the credit score of a person, the more benefits they get. 

  1. Plans for debt management:

This debt consolidation option is for the ones who do not wish to apply for a loan or balance credit card transfer. This plan is an excellent alternative to bankruptcy. In this method, one needs to work with debt relief companies so that they can negotiate with the creditor. These companies draft a payoff plan. All accounts for a credit card are to be closed. The person makes a single payment every month to the agency, which in turn pays the creditor. The billing statements with be received for the creditor. So it is easy for one to track the refund process. 


So, there are many debt consolidation options available in the market. One should research which method would be the best for them. One must avoid subprime lenders who offer bad credit. Even if the credit score of a person is low, they should stick to traditional or trusted options for such matters. A person should always confirm that their lender is authorized. If looking for a trusted financial option, then “Piramal Finance” is a good personal loan/financing option for buyers.