From priority to non-priority, secured to unsecured, there are many types of debt. While some types can be included in debt consolidation or debt management programs, others cannot. The best debt management solution is based on the amount and type of debt the consumer has.
Therefore, consumers should organize their debt into categories before deciding how to consolidate it. Using this approach enables consumers to repay the money as quickly as possible.
A mortgage, secured loan, student loan, rent, utility bills, child support and maintenance payments, business rates, court fines, and council and other taxes are considered priority debts. These items usually cannot be included in debt consolidation.
However, they represent the most urgent repayments so they cannot be ignored. Consumers must find a way to repay past-due balances for these items while addressing other debts.
Credit cards, store cards, bank loans, overdrafts, catalogue repayments, and home-collected credit are non-priority debts. These usually can be included in a debt consolidation program. A debt consolidation loan is the most popular way to consolidate debt.
A single loan is taken to repay qualifying unsecured debts, leaving the debtor with only the consolidation loan to repay. Debt repayment becomes less expensive because the loan features a lower interest rate than the rate associated with each existing debt.
When a consolidation loan is used, the debtor deals only with one lender and makes one monthly payment. The payment may be lower because the loan usually extends repayment over a longer period to make it more affordable.
Debtors who use a consolidation loan know when they will be finished repaying their debt and as long as they make payments on time, they will begin improving their credit rating.
The goal of a debt consolidation loan is not to reduce the amount of debt repaid but to make it more convenient and less expensive to repay the money. Consumers who have a lot of debt or a bad credit rating may only qualify for a secured loan. In this case, the home guarantees the loan, reducing the lender risk.
Consumers should consult with a debt management professional before agreeing to this arrangement because defaulting on the loan could put the home at risk.
While loan payments are being made, the individual will need to keep making payments on debts that are not covered. This makes it important not to financially overextend oneself with the monthly loan payment.
Consequences of defaulting on a debt consolidation loan include late charges, additional interest, negative credit impact, and collection actions.
It may also become more difficult to qualify for other debt management solutions.
People who are falling behind with paying bills should get free debt management advice before the problem worsens.
Our experts will review your financial situation and suggest ways to eliminate debt. If a debt consolidation loan is included in our recommendations, we will help you find a lender that offers a low interest loan and affordable repayment terms.
Once you have consolidated your debts, you will be on your way to becoming debt-free.