All You Need to Know About Debt Consolidation Loans
Juggling three or more personal loans, such as credit card debts, medical bills, student loans, not to mention other financial obligations can already make monthly budgeting a strain. The complicated task may cause you to miss monthly payments, or you may simply just have a hard time making the payments due to the multiple debt inflamed by other financial challenges. So your multiple creditors are making sure your phone is ringing off the hook, collection letters are piling up, the stress level mounts, and you have no idea how to do deal with it. As this continues, month by month the interest of your debt is slowly burying you. People in this same situation turn to debt consolidation loans. These loans are designed to help people get out of this debt pit.
What are Debt Consolidation Loans?
A debt consolidation loan is one large loan taken out to help pay off several unsecured debts so that the borrower would only be making a single payment for the new loan instead of paying for multiple loans.
Two General Types of Debt Consolidation Loans
The borrower has the option of taking out a debt consolidation loan as an unsecured loan or as a secured loan in the form of mortgages. But remember, the debts that are to be consolidated are the unsecured type even if you are taking out a secured debt consolidation loan. The advantage of a secured debt consolidation loan is that you can get an even lower interest rate if you secure the loan with a property you own and the interest you would be paying can be tax deductible. However, you put your property on the line because if you default, your lender would have the right to start foreclosure proceedings on your house.
What Do You Get From Debt Consolidation Loans?
Easier monthly budgeting. This is the most obvious benefit of getting a debt consolidation loan. With your multiple creditors fully paid, you only have to make one monthly payment for the new loan making budgeting much easier.
Less stress. Fully paying your creditors using funds from the debt consolidation loan will liberate you from the collectors who are breathing down your neck. It also helps you sleep better at night knowing your payments are now current with your new loan.
Lower interest rate. Rates for debt consolidation loans are designed to be lower than the rates of most personal debts especially those of credit cards. This helps you afford your monthly payments and eventually pay off the entire debt over time.
More affordable monthly payment. Just like the interest rates, monthly payments for debt consolidation loans are designed to make paying each month easier for you so that you can eventually pay up.
Longer payment period. This can be a benefit and a curse: a benefit because it makes payment more affordable, hence, helping you stay current on your payments; a curse because you will be tied to debt a few more years longer. The interest rate and monthly payments may be lower, but your creditor recoups its “losses” here by making you pay more years. This means that the total interest you would be paying throughout the loan period would actually be greater than you would have been with your multiple creditors.
Eventual credit rating improvement. You easily making the monthly payments and paying off the loan over time will have a positive impact on your credit record.
How Do You Qualify for a Debt Consolidation Loan?
A substantial income and a decent credit score helps to convince the lender that you can make the monthly payments while paying for monthly expenses. Obviously, secured debt consolidation loans require that you own a property that will serve as collateral. Also, the total amount you owe must be substantial enough to qualify you for such a loan.