Combining the various debts into a singular one and repaying them through one payment rather than multiple ones each month is called debt consolidation. This action is usually done to simplify payment of multiple loans and, in some cases, even reduce payments, due to the act of consolidation changing the interest rate of the debt. The act of debt consolidation can be used to minimize damage to your credit score, potentially keeping you in the green despite your current state of loans.
However, not all debts can be consolidated. In the following few paragraphs, we will cover which loans can be bundled into this convenient package.
1. Credit card loan
Some of the most common loans come from card use. These loans belong to the type of loans called unsecured loans. They are not backed by any of the borrower’s assets that may work as coverage in case the borrower doesn’t repay their debts properly. This makes them riskier for the lender to initiate, but this risk is usually justified by some of the quirks these loans possess. They are characterized by high-interest rates and offering smaller amounts of money to loan. Their key benefit is fixed rates, giving consistency to the repayment process.
However, they are also the most common targets of scams. There are groups that offer debt consolidation loans that utilize bait and switch schemes to lure you in and profit while hindering your financial situation. Whenever you get a questionable message about the affordable consolidation of your loans, make sure to google a bit to check. There are some telltale signs of this scheme you can run into, so we suggest you get acquainted with them through this Credit9 review.
When consolidated, the high interest rates of multiple cards can be melded into one, which usually results in a cheaper payment option. Despite their name, credit card loans include other cards and miscellaneous personal loans. These include store cards, gas cards, charge cards, unpaid medical bills, payday loans, and others that fall in the same branch of unsecured loans that can be consolidated. The versatility these loans possess is only expanded on through the ability to consolidate them.
2. Student loan
Student loans are among the most common types of loans. A lot of people seeking higher education have to resort to this style of financing for the sake of paying for tuition every year. However, repaying them can be rather stressful, especially if multiple loans accumulate.
Student loans are a bit of a special case. They can be consolidated through several consolidation options that are available through federal government programs. When consolidated, their new interest rate will be equal to the average interest rate of previous loans. It’s important to keep in mind that private loans don’t qualify for this program at all.
3. Tax debt
Even tax debts can be consolidated, affording an easier way of payment. Any taxes you owe to the IRS can be bundled through their consolidation options. Keep in mind that not all taxpayers qualify for these consolidation options, so make sure to inform yourself whether these options are open to you.
The first option you have includes setting up an Installment Agreement with the IRS.
What this means is that your tax debt is split into manageable payments, affording a simpler payment process with less strain on your funds.
The other option on offer is the ability to include it in a personal debt consolidation loan.
This will result in standard consolidation where your debt to IRS and other loans are covered by a bigger loan that replaces them.
4. Specialized consolidation
Following loans are specialized in their use and can be consolidated either through regular means or special programs. These loans include medical debts, military debts, and payday loans. Payday loans utilize a debt consolidation program most of the time, military debt has a Military Debt Consolidation Loan, and medical loans utilize a debt consolidation plan.