The words “debt consolidation” have been popular for a long time. That’s because it is a concept that has helped a lot of people get out of a bad financial situation. If you are unfamiliar with what the term exactly means, this is the place where you will learn more about it.
A debt consolidation loan is a loan that will be used to pay the debts that you currently have in full. You might wonder why you would take on more debt to pay your current debts. After all, it doesn’t entirely eliminate your debts.
It’s true that a debt consolidation loan will not eliminate your debts right away, but it will offer you several advantages. For example, you may have several liabilities. You are making monthly payments for your auto loan and your personal loans. When you consolidate, all of those loans will be paid in full. Then, only your consolidation loan will remain. Most likely, your consolidation loan will have a much lower interest rate than the rates on all of your other loans combined. This will mean that you will be making a lower monthly payment.
If you have several credit cards that are carrying balances, a consolidation loan would combine those into one, and you will be able to pay them off in a shorter amount of time. You can also do this with student loans and many other kinds of debt.
Secured and Unsecured Debt Consolidation
You have the option of obtaining a secured debt consolidation loan or an unsecured debt consolidation loan. Secured loans require that you offer something of value as collateral. Generally, the collateral is a house or it can be a car.
If you do not own a house or a car with enough equity, you may be able to qualify for an unsecured debt consolidation loan. It’s harder to qualify for these loans, and you may not be able to borrow as much as you need. Plus, the interest rate will be a little high, but these loans do have advantages. Although the interest rate might be high, it will, most likely, be lower than the interest rate on your credit cards. Another bonus is the fact that the interest rate is fixed, and this cannot be said of your credit cards.
Who Is a Candidate for Debt Consolidation?
- They have several debts
- They owe at least $10,000
- They are constantly being contacted by collections agencies
- Their interest rates are extremely high
- Their monthly payments are very high
- They have trouble paying their bills on time every month
Obtaining Your Loan
If you are interested in a debt consolidation loan, the first thing you can do is approach your lending institution and apply. You must have a positive payment history with the lender in order to do this. In the event that your lending institution turns you down, you are free to go to a private mortgage company or private mortgage lender. You may be able to qualify with a lower credit score with these institutions.
You must be aware of a few things before you seek a debt consolidation loan. First, lenders are eager to give you the longest loan terms they possibly can. This would mean that you would be re-paying your consolidation loan for a longer period of time than it would take you to re-pay your other loans. In this case, you would be paying more in interest for the consolidation loan than you would for your other debts. So, make sure that you know exactly what the terms are before you sign anything.
To ensure that you are not making a mistake, contact each of your lenders and ask them how many years it will take you to have the debt paid in full. Then, make sure that the terms of your new loan do not exceed that time period.
A Few Drawbacks
Be prepared to see your credit score go down. When you consolidate, debts with a longer payment history are eliminated. This will leave you with a larger debt that is also new debt, and this means that you are now a higher risk for lenders. Further damaging your score is the fact that you have less credit available to you.
Finding Your Way toward Financial Stability
Debt consolidation will not end your financial troubles. The only thing that can do that is learning how to save and spend your money wisely. The Federal Trade Commission can help you do this by teaching you how to develop a budget, manage your loans and help you find reputable credit counseling services. These will be very helpful to you because if you do not learn how to handle your money responsibly, you will find yourself in the same predicament again.