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Debt financing can be a great tool for personal debt consolidation. Debt finance is the use of debt to purchase an asset, and a debt-financed purchase is one in which the purchaser borrows funds from a lender, typically a financial institution such as a bank or credit union, to make their purchase. The debt financed purchase becomes part of your debt burden because you will need to pay back the money that you borrowed with interest payments. It’s important to know all about debt financing before applying for it; this post discusses what debt finance is and how it may help consolidate your debts into one manageable monthly payment.
What is debt finance?
Debt finance is a form of financial leverage where one takes on debt/borrows money from a lending entity, such as a bank. Debt finance typically allows the borrower to buy assets now, for example for capital expenses or working capital, and pay back the loan with interest over time from future cash flows from operations. In many cases, the borrowing entity guarantees to provide credit-worthy buyers with access to sources of funds that would not otherwise be available to them without defaulting on their line of credit or cashing in noncurrent investments at less than market value.
Types of debt finance
Debt finance is the general term for any borrowing an entity undertakes to raise money. Two common types include secured and unsecured loans.
Secured debt is backed by assets, so if an entity fails to pay back the amount of the loan plus interest, creditors can seize the asset that they used as collateral.
Unsecured debt isn’t backed by an asset; it’s based solely on creditworthiness–typically that score ranges from A+ to D-, with scores above 600 usually indicating better-than-average creditworthiness. Due to this lack of collateral, rates tend to be higher than those with secured debt (in other words, with higher credit scores).
How do you get a loan for your debts
Find out if you’re eligible. If you are, find a lender that’s willing to grant a said loan. If banks are not an option for any reason, there are companies that specialize in lending against individual assets such as stocks or properties. Apply and wait for the approval. You’ll then be given the terms of your new loan and given the resources necessary to pay off your high-interest loans with ease! It can take up to two weeks before receiving a response from creditors once you’ve submitted the application. This is because it takes time for them to validate sources and confirm net worth statements and other factors related to obtaining a personal loan.
Benefits to getting a loan for your debts
Getting a loan could be an advantage if you are in continual debt. Debt consolidation programs are usually the best way to save money by paying less in interest on loans with rates that may be lower than the percentage of your credit cards. For example, if you have three credit cards charging at 18% interest each, and have to pay at least 35% in every monthly payment, then your minimum payment is $120 per month, but with a debt consolidation program at the same 18% rate, you only need to repay around half that amount each month which can make it easier for someone who has issues with managing their money.
Things to consider before taking out loans to pay off existing debts
It’s often easier to pay off high-interest debt than it is for low-interest debts. It’ll also save you money in the long run because your payments will be lower if the higher interest debt is paid off first. To put together a plan, it’ll help to list all of your debts and their effective rates, which tells how much you can afford to pay each month without jeopardizing other goals or lagging behind on existing payments.