Understanding Consolidation: Debt Loan and Credit Explained

If your bills are pipling up and you are finding it difficult to make timely payments or to make more than the minimum payment each month, a debt consolidation loan may help you. The following is a look at the basics of credit and how consolidation works.

Credit

Your credit is your ability to borrow money, based on proven trustworthiness. If you have a history of paying your debts in a timely fashion and in full, you are said to have good credit. This means that banks will be willing to lend to you and credit card companies will be willing to offer you a credit line. On the other hand, if you have a history of making late payments or of defaulting on payments, this means you have bad credit. This will make it very difficult for you to borrow from lenders or to get a credit card. Your credit rating or score is kept track of by three credit bureaus; Equifax, Experian and TransUnion. These agencies keep track of your credit history and current activity and express your credit rating as a number. The higher the number, the better your credit. 

Reasons to Consolidate

If you are finding yourself unable to make timely payments on your loans or to make more than the minimum monthly payment, and you have several loans, it may be to your advantage to consolidate your debt. It is best to talk to your banker or a credit counsellor before deciding to consolidate. 

How Consolidation Works

Consolidation does not eliminate your debt. When you consolidate, you are basically taking out one big loan to pay off all your other loans. The bank or financial company you use will reorganize your debt into one loan. You will then make one monthly payment instead of several. This new loan will have an interest rate reflective of the amount of the loan. There are two types of consolidation loan: A secured loan, which uses your home or other property as collateral; and an unsecured loan, which uses no collateral and is instead backed by your credit. If you do not have good credit and you do not own a home you can use as collateral, an unsecured loan can be very expensive. This is because your interest rate will be much higher than under prime conditions. If you decide to consolidate, you can do so through a bank or a financial company.


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