A debt consolidation scheme is a process of combining several high-interest outstanding debts into a single loan. This new loan carries a low-interest rate and has favorable repayment terms. It is a suitable option for individuals and entrepreneurs find it difficult to clear their credit card dues. They get the opportunity to become debt-free and get their finances back in order.
Reasons for applying for the best debt consolidation scheme
People apply for a debt consolidation loan scheme for the following reasons:
- They can make a single loan repayment every month instead of many repayments on different due dates
- The low rate of interest on the loan helps them to save money,
- The single monthly repayment does not overburden their budget.
- They can clear all of their outstanding debts within a short time, and
When is debt consolidation a good option?
Individuals and entrepreneurs operating small businesses should consider opting for the best debt consolidation scheme when:
- Their total income is twice as much as their current outstanding debts, excluding mortgages,
- They have a good credit score, which makes them eligible for interest-free credit cards,
- They earn enough income to pay off the monthly repayments on the debt consolidation loans,
- They have no intention of accumulating debts again.
What are the various debt consolidation schemes?
Debt consolidation schemes can be in the following forms:
- Home equity loans, which carry a low rate of interest and are often known as the second mortgage,
- A line of credit for borrowers with a good credit score who can provide suitable collateral,
- Loans from banks for people who can provide security and have a reasonably good credit score,
- Loans from financial companies which have less stringent conditions than those of banks,
- Credit cards carrying a low-interest rate for borrowers having sound creditworthiness, and
- Debt management programs for borrowers who cannot afford the minimum repayments.
How do debt consolidation schemes affect credit scores?
Taking out a debt consolidation loan does affect the credit scores of individuals and entrepreneurs if:
- They have a history of making all of their minimum monthly repayments on time,
- An inquiry finds they a low credit utilization ratio at the time of taking the loan,
Tax implication of taking debt consolidation loans
The Internal Revenue Service (IRS) lays down specific rules on debt consolidation loans. Individuals cannot claim any tax deduction on the monthly interest payments if their loans are unsecured. However, only those who provide collateral at the time of taking the loans can avail this advantage.
Taking out the best debt consolidation scheme allows individuals and entrepreneurs to combine several small outstanding debts into one loan. They only pay a single repayment every month against this loan. Moreover, the low-interest rates on loans under this scheme help them to save money. This enables them to become debt-free within a short time. They need to ensure they do not miss any loan repayment or come under the burdens of debts again.