A debt consolidation loan is a single loan that is used to liquidate or pay off multiple loans or debts.
The act of using a single loan to offset other several debts is known as debt consolidation.
Such loans come with above-average interest rates that culminate into monthly bills that become uncomfortable for you to manage.
At that point, your loan or credit card becomes extremely difficult to manage.
Your debt management plan is what will determine whether you are going to come out of debt soon, or keep sinking into it further.
So, how can you solve your debt problems with the help of a consolidation loan?
The answers to the highlighted questions below will give you a clearer understanding of a debt consolidation loan.
Is debt consolidation a good idea?
Are you making any efforts to improve your spending habits and manage your debts?
What is your credit score like?
These are some of the factors that will determine if debt consolidation will be accessible by you or not. Debt consolidation might be okay if you:
- Aim to pay off your whole debt with a consolidated loan.
- Your earnings are good enough to cater to your debts.
- You are okay with the option of paying back your loan over an extended period of time at a reduced monthly repayment amount but an increased interest rate.
- There has been an increase in your credit score since cleared your initial loans.
- You’ve mapped out a plan not to raise your debts.
If you don’t tick all the boxes above with a positive response, then debt consolidation may not work for you as expected.
Is it really worth it?
It is advisable to ever get a debt consolidation loan Is it something that could be detrimental to you in the long term?
How will it solve your debt challenges? You will need to look at this subject from these perspectives holistically.
Basically, debt consolidation is all about using a single loan to settle your other loans.
As such, you may just be asking yourself – So if it is another form of a loan, of what benefit will it be to you then?
A lot of people are resorting to debt consolidation loans because of its’ awesome benefits.
If you are obliged to different creditors, a loan like this will help you fix that debt sooner than you can imagine.
One of the reasons why it is recommended is because it consolidates and simplifies all your debt repayments to just one.
Do Debt Consolidation Loans Worsen Your Credit Score?
Technically and practically a debt consolidation loan is meant to improve your credit score.
Ideally, it is never intended to deteriorate your credit score. If you use the loan to settle your debts, then your credit score should start increasing as time develops.
Initially, after getting the debt consolidation loan, you might experience a decline in your credit score. That is okay. The score will improve again.
Though that is on the condition that you pay off those debts on time. Also, you are to ensure you don’t end up with more debts within this period.
This will be an additional problem. Some people get a consolidation loan and a worse credit score in the process. They didn’t pay off their debts with the loan. That’s why!
Also Related: How to get out of Debt Fast:23 Proven Ways.
What Is The Best Place To Obtain A Debt Consolidation Loan?
There are a number of places to apply for a debt consolidation loan.
It can be accessed via regular banks or even credit unions. It is also possible to get such loans via online lenders.
How Do You Get a Debt Consolidation Loan?
Before you can get a debt consolidation loan, you need to apply for a consolidation tool.
A consolidation tool is in the form of a balance transfer credit card, personal finance loan, or others.
You can obtain this via the bank or any legitimate lender. Thus, if it is a debt consolidation loan, the debts could be directly taken care of by the lender. Or the individual could be given the funds to repay their outstanding debt balance(s).
After the debt of the borrower has been refunded, he or she will only make a one-time monthly payment. With a debt consolidation loan, the borrower has the luxury of a relatively reduced monthly repayment amount.
The payable monthly amount is lesser because the repayment duration will need to be extended.
Consolidating debts equally streamline payments, as well as making it easier for finances to be managed.
What Should You Do Before You Apply for a Debt Consolidation Loan?
A debt consolidation loan will help you sort out several of your debt problems.
Do not be so high-spirited to apply for it. Instead, strive to know certain important details about such transactions.
These details are the terms and conditions. The different lenders have various terms and conditions for issuing such loans.
It is important you comprehend the terms and obligations of the lender before going ahead to apply for the loan.
For a start, seek to know their interest rates. Also, find out the duration of the loan repayment.
Regardless of whether you are getting the loan online or physically, get these sorted out first.
These are some of the things you should do before applying for a debt consolidation loan.
Benefits of debt consolidation
- Simplifies your debt management plan since it integrates all your loans into a single, streamlined payment.
- Could reduce a loanee’s total interest when they choose to consolidate to a 0% interest credit card balance, a secured loan, or a personal loan with a low-interest rate.
- May reduce the monthly payment a loanee (borrower) needs to pay on their debt since the payment duration will be extended – although this could amount to a higher interest rate over the course of the payment. With fixed loan payments, borrowers are likely to terminate their debts much sooner. That is particularly when it has to do with huge credit card debts.
- Less emotional stress – surveys have shown that people who have several debts to pay are often stressed. That is because they are mostly thinking of how those debts can be repaid.
Can I Get A Debt Consolidation Loan With Poor Credit Score?
Frankly speaking, it is difficult or almost impossible to get a debt consolidation loan with a poor credit score.
Although debt consolidation helps you improve your credit score, lenders are skeptical when you have a poor credit score.
As such, some lenders don’t like to consider people with a poor credit score as part of their scheme.
That means such lenders will not be granting your request if you have a poor credit score.
That said, there are organizations that may be willing to approve your request for a loan. But, in most cases, you may have to pay higher interest rates on the new loan.
Higher than what you had to pay on the separate debts. So while financial experts may not recommend that, the choice is yours to make.
What Type Of Loans Are Best For Debt Consolidation?
There is nothing like the best debt consolidation loan.
Just because it worked for someone else is not a guarantee that it will work for you. With that said, there is a loan type that will be best suited for your kind of person.
You need to sit down and figure out your goals to know which one will be the right fit for you. Decide whether you prefer fast funding, zero or low fees. Or you just like the idea of consolidating a huge amount of debt.
The majority of lenders give their borrowers longer time to pay back, which ultimately reduces their interest rates. For those with poor credit scores, the best thing is to go to lenders whose specialty is to offer loans to people with such credit scores.
What Credit Score Do I Need For A Debt Consolidation Loan?
Lenders don’t just give out a consolidation loan to everyone that applies. You will need to meet specific requirements before you can qualify for the loan.
One of such requirements is your credit score. There is a minimum credit score that qualifies you for this loan.
A good number of lending organizations only offer the said loan to people whose credit score is somewhere around 650. In most cases, it is around 650.
So, while that is the case, some other lenders approve debt consolidation loans for people with a lesser credit score. Some work with people whose credit score is as low as 580.
Fortunately, you can monitor your credit score with many online tools today. With such information, you can easily reshape your spending habits and every other consumer behavior you can fine-tune.
What Are The Risks Associated With Debt Consolidation Loans?
A consolidation loan does not work like when you wave a magic wand. You need to meet the requirements for you to qualify.
There is a couple of risks associated with a loan of this nature. The most significant risk is that you stand the chance of going into more debt.
Yes, the consolidation loan lets you settle your old debts. But you should understand that you have a new debt to take care of.
That is why you would need to reduce and manage optimally your expenses. If you don’t do it that way, you will only end up getting yourself involved in more debts. Then, the very purpose of getting the loan in the first place will have been defeated.
Debt consolidation has its own liabilities. Some money lenders will never tell you this. Well, below are some of the cons of debt consolidation that you need to be aware of.
- Lenders could demand charges for the balance transfer, closing, or loan disbursement
- Sizable collateral may sometimes be needed. For instance, a home.
- Should not be seen as a guarantee for reduced interest rates, particularly for those with a poor credit score.
- A longer period of repayment could cost more eventually
- Does not necessitate borrowers to improve how they manage money. As such, there is every tendency for more debts to resurface later for the said individual.
If you are comfortable with all the points here, then you can conveniently go ahead and apply for the loan.
According to this post, whether a consolidation loan is ideal for you depends on certain factors.
Your current credit score, spending habits, and debt management plan are some of those factors. With these factors, you can determine if it is for you or not.
You cannot just wake up with zero debt repayment plans, and think a consolidation loan will solve all your debt problems. As a matter of fact, you would be back to where you started with that approach.
So if you think that a debt consolidation loan is perfect for you, fine! However, before you commit to any lender, know their loan terms and conditions.