Are you thinking to apply for a debt consolidation loan?
If yes then you are at the correct place! There are features of a consolidation loan that can assist in managing your debt. With debt consolidation, you can compile multiple high-interest rates into one payment.
Generally, the interest rates in debt consolidation loans are lower and this helps reorganize and reduce the total debt so that you are able to pay it as quickly as possible.
This approach comes in handy when there is a need to reorganize numerous bills that have different interest rates, due dates, or payments. Unsecured debts can be easily paid off by using a debt consolidation loan.
To make you understand it better, we have curated this article that will help you understand a number of ways of debt elimination. But before diving deep, let us first understand what is a debt consolidation loan.
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What Is Debt Consolidation Loan- Introduction
In simple words, it is a type of refinancing with which the borrowers can pay other debts. To get rid of the credit card balance, small loans, and other bills, one can use a debt consolidation loan.
The debt consolidation loan is a method to control or manage your finances in a better way. But you must be meticulous or else you will end up accumulating more debt.
How Does The Debt Consolidation Loan Work?
A debt consolidation loan will help you by simply turning the high-interest and small balance of your credit card into a single payment. When you are consolidating your debts, instead of multiple payments, you will have to make a single payment which is monthly.
In this financial strategy, the interest rate is much lower than the one compared to what you are paying on all of your debts. This means that you will have to pay lesser charges for interest and this way, your debts will be cleared quickly. Also, the interest rates in a debt consolidation loan are fixed and do not change often. So the amount you will pay each month is the same.
Let us try to understand it this way. Suppose you have two different credit cards with different balances and different interest rates. If you choose to take a debt consolidation loan, you will now have to pay an interest lower than the interest rate of these two credit cards and a single monthly amount.
Choosing The Best Debt Consolidation Loan Lender
One of the most important things before taking a debt consolidation loan is your credit score. And before selecting the lender, it is imperative you check your credit score. It can be checked in multiple ways. Websites like Credit Karma and Credit Sesame are good options.
However, you must know that the credit score calculated by these websites is not the actual value of your credit score, these values are nearest to your credit score which will be used by a bank to determine if you qualify for this or not. So you can take these values for reference but should not completely rely on them.
There are some factors that you must consider before finalizing a debt consolidation loan lender. These factors will help you choose the right lender.
Interest rate: Before concluding on one option, make sure you do some research and find out how much interest you will pay on your debt consolidation loan.
Loan amount: there are multiple places or purposes where you can implement a debt consolidation loan. In most cases, this loan is used to pay debts or credit card balances that have high-interest rates. Make sure that the loan amount your lender will pay you is sufficient enough to pay those balances and leaves some additional amount for emergency use.
Repayment term: Even when the interest rate you will pay seems fine to you, you must look for different terms when it comes to repayment terms. This will decide the monthly payment and cost of your loan.
Additional fees: In addition to the interest rate, find out in detail about any other penalties like late payment or other upfront fees.
What are the benefits of the debt consolidation loan?
We have known a number of things about debt consolidation loans and now let’s go on to the benefits of it.
- Quick payment of debts- paying the minimum credit card balance can be an eternal process. Using the debt consolidation loan can speed up the process.
- Saving interest cost- Saving money on the interest costs is possible with the debt consolidation loan. If you are able to qualify for a lower interest rate compared to the interest rate you are paying without a debt consolidation loan, you are likely to save money here.
- Simple monthly payments- When you take a debt consolidation loan, you will pay a single payment each month instead of multiple payments which are with different due dates. This reduces the complexity and you will never forget paying this single amount hence our credit score will be not affected.
- Sticking to a fixed schedule- Most of these loans have fixed installments. This means that you will stick to the fixed schedule until you pay off all your debt. And, you will know the exact time when you will be free of debt.
What Are The Risks Associated With A Debt Consolidation Loan?
Everything has its own pros and cons. The same is the case with the debt consolidation loan.
- There are a number of additional or upfront costs attached to a debt consolidation loan. Not all lenders will educate you about these. It is important you ask for any additional or upfront fees like annual fees, balance transfer fees, origination fees, etc.
- It is possible that you will again use your credit cards even when you have started paying your old debts with the debt consolidation loan. Instead of helping you resolve the financial issues, it will add up to more issues.
- If you choose to pay smaller amounts in your monthly payments by extending the term of repayment, you may have to pay more interest in this extended term.
What are the alternatives to a debt consolidation loan?
Now that you are aware of the risks that are attached to the debt consolidation loan, you must also find out alternatives to a debt consolidation loans. Also these alternatives can turn out to be helpful when your credit score is not great. Let’s check them out.
- Debt Management Program(DMP)- These are usually handled by a non-profit organization or credit counseling agency that negotiates with the creditors. The debts are repaid at a lower interest rate. The agency pays the loan amount to the creditors after charging you with an administrative fee.
- Balance cards- These cards help you transit from the higher-interest card to a lower interest card or a card with a low APR.
- By making a minimum payment- to stay away from bad credit and to stay away from further interest charges, simply pay the minimum amount each month on your debts.
With this, we have reached the culmination of debt consolidation loans. We have tried to cover all the important points here. There are many features and benefits but in the end, you must decide if the debt consolidation loan is the right choice for you or not.
