Types of Debt You Can Consolidate
What types of debt can you consolidate? The following are three major types of debt people consolidate, though there are others, such as car debt and mortgages. You will need to consult with a debt counselor and a debt consolidation company to determine whether consolidation is a viable debt free solution for you. Not everyone can-or should-consolidate. Your credit history and current situation - including amount and types of debt as well as well as income level and collateral (for certain types of consolidation) - will affect your candidacy.
Unsecured loans
Unsecured loans are those that require no collateral. You may consolidate several unsecured loans, such as a cash advance, into another single unsecured loan, but one of the more popular forms of consolidation is consolidating unsecured loans into secured loans. This is riskier for you, but less risky for the lender. Because secured loans do require collateral, such as a house, car, or other big-ticket item, you'll want to consult with a financial counselor and your consolidation company to determine whether this is the best option for you. You may not have the credit or means necessary to consolidate into a secured loan, either. The most common collateral offered up is a house. A mortgage is secured against the house, and you agree to a foreclosure in order to pay back the loan in the event you cannot pay by other means. Because the risk to the lender is lower, the lender can offer a lower interest rate. With a lower interest rate, you could pay off your debt more quickly than with an unsecured consolidated loan. However, be certain you can afford your new repayment plan, or the item or items you borrowed against will be sold and used to pay back your debt. You want a debt free solution, not a house-free solution.
Credit card debt
Perhaps the most common use of consolidation is a debt free solution to credit card debt, as credit card debt is one of the most common forms of debt-and the typical high interest rates attached to credit cards aggravate the problem. It is considered a type of unsecured loan. Some attempt to pay off one credit card with another (and so on), and others try negotiating interest rates, transferring debts, and closing out certain credit cards. Remember that these methods of repayment can and likely will adversely affect your credit rating. Consolidation, while it can make a slight dent in your credit score at first, could be a great option for those with a large number of credit cards, or a great amount of debt on cards with high interest rates. Also note that consolidating will not reduce your debt, and that opening new credit accounts and charging more to your existing credit card or cards will work against your consolidation efforts.
Student loans
For federal student loans made directly to students, and for students who have taken out large dollar amounts in student loans, consolidation is one option to consider that can help with repayment. Except for slightly higher interest rates when consolidating certain fixed-rate loans with identical interest rates, your new interest rate will fall somewhere between your previous highest and lowest amount, and will cap out at 8.25 percent. It is a fixed rate for the lifetime of the loan. Students with mandatory residencies and unpaid internships sometimes may opt for a new deferment plan. Note that you cannot consolidate your loans while you are still enrolled in school. Also, you cannot reconsolidate unless you add in other student loans you had not previously consolidated, or you consolidate with the Department of Education. Federal student loan consolidation does not incur any fees, unlike consolidating in the private sector. If you have federal education loans, you should consider consolidating them into another federal education loan, rather than into a private loan, unless you are advised to do so.
