As different situations dictate different solutions; there are different types of consolidation loans. One of these is a Government Debt Consolidation Loan. This type of consolidation loan is offered by a government program or agency to persons who need to pay off debts owed to multiple institutions. Amongst the many reasons the government extends these types of loans to people, one of them is that this is a way to facilitate financial transparency. Furthermore, it presents opportunities to create more fluidity in the market place.
The debtor surrenders outstanding balances to the government program or agency which pays off everything; in turn it issues a new consolidated loan representing the balance owed and some interest. This works for the debtor because the interest rate does not change. In the event of defaults or failure to pay, the interest rate changes; but this is does not happen immediately because the lender and borrower agree on terms and conditions from the onset to protect each party.
Consolidation loans are normally divided into four broad types;
- The standard payback plan – sets a general monthly payment amount which is consistent over the whole loan period.
- The extended payment plan – increases the loan period by decreasing the monthly payment, with a higher interest rate.
- The graduated payment plan – starts with a lower monthly payment but increases after an agreed period of time.
- And the income contingent plan – designed for individuals in the lower-income bracket. The borrower’s salary and earning potential are taken into account when the monthly repayment rate is set.
One of the best features of this type of loan is convenience; the borrower makes only one payment, to one institution, saving time and money as monthly payments are lower, rather than making several payments at different locations. Moreover, the borrower deals with only one agreement avoiding the confusion of dealing with different sets of terms and conditions from the many institutions owed.
Consolidation loans exist for various debts, depending on national jurisdiction, agency availability and local laws. Easy repayment timelines also make this a suitable option for individuals and families with multiple debt accounts.