Debt consolidation loans are loans that are given to individuals to help them pay off other smaller loans they have. The smaller loans are combined into one and are paid using a lower interest loan. In turn, the borrower enjoys lower monthly interest than would have been the case if he was making individual payments for each smaller loan.
People opt to consolidate their loans for various reasons. These include:
- Difficulty in dealing with several creditors at the same time.
- To have the convenience of paying a single easy monthly payment for all the bills they have.
- Difficulty in paying the bills they have in time.
- Difficulty in managing different bills from different creditors at the same time.
- To save on their monthly interest rates on their bills.
Benefits of Debt Consolidation Loans
There are several benefits of getting a debt consolidation loan. These include:
- Low Interest Rates - The loans are usually given at a lower interest rate than other comparable loans like payday loans, short term loans, credit card loans and others. When you consolidate your loans, you will cut the high interest rates of these loans to a single flat low monthly rate.
- Reduce Inconveniences - Paying about 10 loans every month can be stressing, keeping in mind you have to work out things like cash flows, your income, etc. A consolidation loan will reduce your stresses as you will only have to pay a single amount every month. This can also help you organize your finances and clear your loan quickly.
- Makes Budgeting Easier - Since you only have to pay a single flat monthly payment, you will be able to control your debt effectively and plan well for you future.
- Improves Your Credit Score - When you pay your debt consolidation loan in time, your credit score will improve and you will move from a high risk borrower to a medium risk one. This has many advantages especially if you will need to borrow in future. Thus, it is important to learn how to check your credit score and how credit scoring works.
- Longer Paying Period - Unlike regular loans, debt consolidation loans are given out at low interest and for a longer period. This is the primary reasons why their monthly payments are lower than those of regular loans.
Debt consolidation loans have two main disadvantages:
- High Cost - Since the loan is paid over an extended period of time than the comparable regular loan, you will end up paying more in the long run.
- Longer Lasting Debt - Depending on your financial situation, you may have to extend the term of your loan in order to make the monthly payments affordable. This may cause you to pay less every month but it will turn out to be more when all the payments are added at the end of the term.
Qualifications for Debt Consolidation Loans
To qualify for a debt consolidation loan, you should have some appreciable income and your credit score should be good. This is required to ascertain that you will be able to repay the loan as well as meet your monthly expenses and bills. Moreover, you won’t qualify for the loan if your total expenses are too low.
You will have to pay some fees to get approved for the loan. The fees are set by the lender you are getting the loan from. While the loans typically come at lower interest rates than comparable regular ones, it is good to check the interest charged by different companies as some can set high rates for them.
When you are going to get a debt consolidation loan, there are four things you should check:
- Type of Bills - Decide which bills you would like to pay off with the loan. It is wise to include only bills that have a higher interest rate and exclude those with lower rates that you can easily pay.
- Plan Your Budget – Apply for a consolidation loan whose monthly payments you can manage. This may necessitate you extending the term of the loan to get lower monthly payments.
- Total Amount Due - Add all your bills to know how much you still owe your creditors. Then, take a loan that is higher than what you owe.
- Check Your Credit Report - With your credit report, you can identify the types of debt that can be easily eliminated with the loan.
Choosing the Right Debt Consolidation Loan
Choosing the right debt consolidation loan is crucial as it will determine the amount of interest you will pay. Lenders calculate their rates based on different factors and this is why the rates are not fixed across all lenders. Check out the following before you get a loan:
- Interest Rates and Fees – Calculate the amount you are currently paying as well as the charges and interest on your bills. Compare this with what you will have to pay for a low debt consolidation loan. The monthly payment should be less than what you are currently paying for your bills.
- Costs – Ask the loan company to outline all the costs you will have to pay for the loan before signing the contract.
- Shop around – Inquire from different lenders to know their rates. Also, do a background check on the lenders to ascertain whether they are legitimate.
