Debt Consolidation Loan
Trying to simplify your bills and save money while doing it? A Debt Consolidation Loan may be the right option for you. But the first step to figure it out is to really understand how it works and how it can impact your finances.
What is a Debt Consolidation Loan?
As its name suggests, a Debt Consolidation Loan is the process of combining all your debts or balances - like student loans, credit card bills, a personal loan, etc. - into one single monthly payment in order to get better rates and ease your financial life. So, instead of making multiple payments with different amounts and rates, you end up paying one bill monthly, with an standardized - and usually lower - rate and a different loan term, which should normally be shorter than your overall debts.
The funds for this new and single payment usually comes from an installment loan commonly fixed in 24-48 months. But there are other ways of getting a debt consolidation loan like transferring your bills to a credit card or taking a long-term loan. Unfortunately, if you decide to go for the second one mentioned, you will end up paying more interests but you will trade those extra amounts for more time to afford your debts.
According to a study made by US News, more than 60% of Americans had gotten a positive outcome from consolidating their debts. Some were able to lower their monthly payments, eliminate debt or even improve their credit score.
REMEMBER: The main idea of consolidating your debt is not only to manage your debts and simplify your debt but also get better conditions of your overall bills in order to save money and time.
How Debt Consolidation Loans Work
There are two different types of Debt Consolidation Loans, and each of them work differently.
> Secured Debt Consolidation loans
Just like all secured loans, they require you to use a collateral to guarantee the repayment of the debt.They usually have better rates than unsecured ones for obvious reasons - the lender can keep the item if you fail repaying. So, it is a good way to save money if you have collateral and meet the requirements that this type of loan asks for. A home equity loan is an example of Debt Consolidation Loan because it uses your house as a collateral. However, picking these one requires a lot of reflection and making sure that you will be able to pay the loan back in order to keep your living place.
> Unsecured Debt Consolidation loans
These loans do not require a collateral or any sort of guarantee of repayment. This is why they are easier to get than secured loans. They are also offered for people that have a low credit score and do not demand to meet hard requirements. Even though these loans seem to be more convenient than secured one, they may have higher rates and end up being more expensive than the previous ones. However, shopping around for them is easier because there are many online lenders and banks that offer them and give the benefit of applying online.
When is the right time to consolidate debt?
Consolidating your debt sounds like a good idea but it’s not always the best idea, depending on your specific situation. So we propose you to be honest and ask yourself these questions. If you have one or more yes as answers, you should definitely start thinking about debt consolidation as an option.
♦ Do you need lower interest rates in your debts, loans or balances?
♦ Do you need lower monthly payments?
♦ Is it getting hard to manage multiple payments in one month?
♦ Do you need - and can afford - getting rid of debt faster?
♦ Do you need to shorten your debt? Or at least control the length of repayment of your debts overall?
♦ Do you want to have a debt freedom deadline?
Pros and Cons of consolidating debt
Alternatives for consolidating
There are some alternatives besides getting a new loan in order to consolidate your loan and make one single payment monthly instead of several.
★ Home Equity Loan: As mentioned before, this is a secured loan that can help you use your home as a collateral to consolidate your debt and get rid of it faster.
★ Credit Card: It can be a balance transfer credit card or simply a low interest credit card that can help you pay out your debts and then just pay monthly your credit card bill. The point of getting a credit card for debt consolidation is to take advantage of introductory rates to pay off your debts without any sort of extra interests.
★ Line of Credit: Applying for a secured or unsecured line of credit with a bank or a credit union can also be a good way to consolidate your debt. The good thing is that you can make lower payments when the month doesn’t allow you to pay the regular amount you propose yourself, but it will make your repayment term longer.
- ★ Debt Relief Program: If you do not qualify for a Debt Consolidation Loan or any of the other products mentioned, you can always sign up for a Debt Relief Program, where experts will help you design repayment plans in order to eliminate interest and consolidate payments into one affordable monthly payment.
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