If you have accumulated debts to cover some of life’s expenses, you might have found yourself in a situation where you are struggling to pay off interest payments each month instead of paying off the debt itself. This is where debt consolidation may be worth considering. Instead of firing off minimum amounts to various providers, get one loan to pay them all and simply make one monthly repayment instead.
However, there are some things to consider as consolidated loans can vary depending on the type. This includes considerations such as whether they are secured or unsecured, as well as your credit rating.
Consolidating secured debts
Secured debts are advances offered to customers that are secured against one of their assets. This means that if you fail to make payments on schedule, you could face having the asset against which the loan is secured seized by the organization you owe money to. Common types of secured debts include:
- Car loans
- Home loans
- Secured credit cards
Consolidating debts means taking out one larger loan to pay off smaller debts so you end up only paying interest on one loan. It can also take the stress out of managing your debt; instead of having to pay multiple loans every month you just have one payment to make.
There are some important things to check when considering consolidating secured loans. To make consolidation worthwhile, you will need to completely pay off in full the secured debts you are consolidating. Failing to do this would mean that your assets are not released from the liability of the old debt.
Interest rates are key here, and you must have a good understanding of your finances to work out what the smartest move is for your situation. There are lots of online calculators that allow you to calculate your repayments based on your current loan agreement, and compare it to another product, including a debt consolidation loan.
Depending on your situation, you may want to move from secured debt to an unsecured option. For example, if you have small amounts of secured debt left to pay off but could get an unsecured 0% interest credit card it may be able to save money on interest by using the card to pay off the secured debt.
Consolidating medical debts
If you have accumulated debt from medical bills, repayments can quickly become overwhelming. There are debt-consolidation products designed specifically for medical debts that could help you get your finances back on track, though. Whether you owe the hospital or another provider directly or used a credit card or loan to pay off the bill, there are options that could make repayment cheaper and less stressful.
When looking at consolidating medical debts, there are different types of consolidation loans that could be appropriate. There are secured loans, that are often based on home equity, which means the lender uses your property to secure the loan. There are also some unsecured loans available if you do not have assets for a secured lending option.
Medical debt consolidation means that you can either pay off debts that are still held with the hospital or pay off loans that you have taken out to pay bills in the past. You will take out one, larger loan that is used to pay off the smaller debts you have either by paying healthcare providers or paying off loans or credit cards – or a mix of all of these options. You then have just one loan accumulating interest, and one monthly payment to keep track of.
Some nonprofits offer debt-consolidation services specifically for people who have come into financial difficulties due to medical expenses. They are a good place to start to find out whether consolidating the debts would be a smart move to save you money. There are also traditional banks and loan providers that offer consolidation loans to cover medical expenses, so definitely do a thorough search to find the best solution for your circumstances.
Consolidating student loans
Student debt can add up fast and repayments can feel crippling, especially when you’re just starting, or have faced an unexpected expense. There are options to consolidate student debt, some of which are run by the government, while others are offered by non-profits or private companies.
Much like the forms of debt described above, consolidating student loans becomes a good idea when you have multiple loans that you are paying back, and you are struggling to make the payments. The solutions on offer to consolidate student debt may make your payments more affordable, by giving you a better interest rate and having fewer fees associated with them.
There are some drawbacks to consolidating student debt, including the fact that interest due on the original loans becomes part of the amount you borrow for the new loan. Meaning you will be paying interest on a larger sum at the outset. You may also want to stick to your plan if it is income-driven, meaning you only pay what you can afford. A debt-consolidation provider will be able to cover all of these scenarios with you to find the most appropriate solution.
Consolidating different types of debt
If you have a few loans that fall into different categories, it is still possible to consolidate them. Some organizations will insist you settle your debts under the one loan, but others will pay it off on your behalf. Just make sure to keep track of what is owed where.
For the majority of consolidations loans, borrowers receive funds they can then use to pay off the debts that perhaps have high-interest rates or a large amount of debt. This means you could use part of the advance for paying off a student loan, and another for a medical bill. Just check with your provider when taking out a consolidation loan to find out if there are any restrictions in place.
As with all of the previous options, make sure you take some time to calculate the most cost-effective way to pay off your debts, and remember to prioritize expensive loans first with high rates of interest.