A consolidation loan simply means taking out a loan and using it to pay off all your existing loans. The consolidating loan has a low-interest rate and one monthly payment which ranges between 12-24 months.
This is a good way to ward off debts which you find have high-interest rates. A debt consolidation loan comes in handy when you feel like you are not making any progress with you multiple debt payments. Yes, consolidating loans is a good idea.
Types of Debt You Can Consolidate
Many believe that consolidation loans will only work with cash debt, and that there isn’t much they can do if they are lagging behind on a different kind of payment.
But there are various debts which you can consolidate. They include:
- Credit cards
- Gas cards
- Unsecured personal loans
- Charge cards
- Payday loans
- Collections loans
- Student loans
- Vehicle loans
How Does a Debt Consolidation Work?
There are different options which you can use to consolidate your debts. It all depends on your current financial situation. Here is a look at some of the various ways which you can use to consolidate your debt.
- New Financing
This is the most common method which you can use to consolidate a loan. Here is how it works:
- You apply for a loan which is large enough to pay off all your multiple loans.
- A lender will consider your credit score and the requirements needed to approve the consolidation loan.
- Choose a loan repayment method. This means you can either choose a shorter period which will have a high interest rate. Or you can choose a longer period which means you have lower interest rates.
- Once the funds are approved you can use them to pay off the existing debts.
- A Consolidation Program
A consolidation program is basically a structured repayment program. Here is how it works:
- Determine which repayment method best suits you.
- Structure a repayment monthly plan.
- Make fixed repayments according to the planned schedule. 0% balance transfer cards.
If you have a good credit score then you can transfer all your debts on a 0% credit card.
When is Debt Consolidation a Good Idea?
A debt consolidation loan gives you some breathing space when you feel like you are drowning in debt. When you can no longer negotiate the interest rates or keep up with the regular monthly repayments then a consolidation loan is a good idea.
However, before taking a consolidation loan, there are a few factors you should consider while consolidating. They include:
- Before taking a consolidation loan make sure your debts do not exceed 50% of your income.
- You have good credit.
- You have a consistent cash flow which will ensure you can make regular payments
A consolidation loan will be a success if you have a plan to keep away from debt. This means you have to make regular payments and avoid overspending.
Benefits of a Consolidation Loan
So, why should you get a consolidation loan? Here are a few reasons.
- A consolidation loan allows you to make regular payments to only one lender. This makes it easier than handling multiple payments from different lenders. The repayment period may be longer but you will have a better management and repayment plan.
- Paying numerous debts can take a toll on you psychologically. There are high chances this will cause stress. When you have only one creditor and one payment to make you will feel more relaxed mentally.
- The overall interest which you pay on a consolidation loan is reduced. However, you should always check the interest rate of a consolidation loan before taking another loan.
- When you have multiple debts chances are you have a bad credit score. This situation will increase especially when you are not making progress to pay off any of your multiple personal loans. Once you take out a consolidation loan you are able to pay off the multiple loans. Your credit score will read that you are debt free with the only loan being the consolidation loan.
A consolidation loan might seem like the best option but actually, it also has its risks. Do remember that only a few lenders will be willing to tell you about these risks when you take out a consolidation loan.
Here is a look at some of the risks:
- The interest rate is not always low. This is because the rates are chosen by the lenders depending on your credit score.
- Consolidation loan terms have longer repayment periods. This means you will be in debt for alonger time.
- Getting a consolidation loan does not mean that your behavior will change. If you are an overspender, chances are you won’t change your habits and will remain in a cycle of debt.