Debt consolidation is the action to take a new loan in order to repay the previous debts. Taking the loan does not mean that you can erase the original debt. Instead, you just combine different debts into a single large debt. By doing so, you can change the type or the lender of your original debt. This can help you get lower interest rates or lower monthly payments.
If you have different types of debts, you can apply for the consolidation to combine the previous debts into a single, larger liability. The payments will be made into the new debt for you to pay off. You can apply the loan through the bank, the credit union, or the credit card company as long as you maintain a good relationship and payment history with the institution. Also, you may find a private mortgage lender or company to get the loan.
Here are some things you should do before you start applying for a debt consolidation.
Check your debt inventory
You should make a list of each of your loan and credit card balance, especially the monthly payments and interest rates. Notice that both the outstanding balances and monthly payments should be included in the totals. You should also check your credit score and make sure the credit history is well maintained.
Select your loan
Generally, there are three types of debt consolidations: secured loans, unsecured loans, and student loans. You may try to find the right one with the lowest interest rates.
Think carefully before you borrow
There are some things you should know before you make the decision to consolidate your debts. First, consolidating your debts does not mean eliminating them. Second, you will have to control your future spending and repay the debt after consolidation as soon as possible to avoid future debt.
To apply a debt consolidation, you will need an employment letter, bills (two months) for each loan or credit card that you want to pay off, and letters from your repayment institutions or creditors. Your credit history is also of vital importance.