Everything That You Must Know about Debt Consolidation Loan Before Applying for It

Hardly anyone in today’s world can claim to have fulfilled all of their responsibilities and wishes without needing to borrow money from time to time. Times are hard, and at some point in our lives, we feel the need to take a loan to manage expenses on time efficiently. However, repaying the borrowed sum may sometimes be challenging.

If you have multiple loan repayments to think about, and if the constant payment reminders are stressing you out, you might want to consider availing a consolidation loan.

applying for debt consolidation loanWith proper debt consolidation, you can bid goodbye to the burden of making multiple payments each month. You would only need to pay once and on a monthly basis after consolidating all your loans into one. Restructuring all existing debts and combining them into one may even help to reduce the overall interest rate to some extent. This type of loan can relieve some stress, both financial and psychological, by helping you to put a check on other debts that may keep piling up otherwise.

What is a debt consolidation loan and how does it work?

Debt consolidation typically refers to the process of taking out a loan to pay off multiple others loans, liabilities, consumers debts and so on, which are usually unsecured ones. This new debt may be massive in size, but it also has more favorable payoff terms. It may even come with a low-interest rate or lower monthly payment, and sometimes, it may come with both. This type of loans can be useful in paying off student debts, credit card debts and other forms of financial obligations that one may accumulate over a considerable period.

In theory, debt consolidation is only the process of financing multiple loans, but it is noteworthy that there are specific instruments which creditors can offer the borrowers. Creditors willingly do this due to many reasons. One of the main reasons is that this type of loan significantly increases their chances of collecting from a debtor. It is also one of the main reasons that established and recognized financial organizations like banks and credit unions offer debt consolidation loans to those who face difficulty in managing their payoffs or the size of their outstanding debts. Due to this, debt consolidation companies have also become quite prevalent over time.

Which types of loans can you consolidate with debt consolidation?

There are quite a few types of loans that you may want to consider while consolidating your debt. Out of these, the most common ones are:

  • Home equity loans
  • Credit card balance transfers
  • Personal loans

Home equity loans: This loan is taken out by using the equity in your home as collateral. A fair amount of capital and good credit are the prerequisites for a home equity loan. Even though this financial arrangement puts your home on the line, it does come with typically low-interest rates. Down the path, if the payments become too much to bear, you can go with foreclosure on your home.

Credit card balance transfers: This service enables you to transfer your credit card balances, all of them, into a single credit card. It also comes with a low-interest rate. What is noteworthy here is that low balance transfer rates are mostly promotional rates, and in most cases, they expire after a period of six months. So, you must keep track of time and note when the typical transfer rates will start to apply. To use credit card balance transfer in a debt consolidation loan, you must first have a credit card with a credit limit that is big enough to hold all your credit card debt.

Personal loans: As per the experts at nationaldebtrelief.com, personal loans are a popular choice for debt consolidation. However, you must first be able to get a loan that is large enough to cover all the balances you may have. A personal loan is an unsecured loan. It comes with the condition of fixed payments over a stipulated period. Upon approval, you may use your this credit to consolidate your debts.

What are the main benefits of debt consolidation loan?

Debt consolidation loan, if you qualify for it, can certainly put you in an advantageous position, and that too, financially, socially and psychologically. Take a look at the five main benefits of going with debt consolidation loan:

Single payment: As stated earlier, this type of loan enables you to combine all your debts into one. This way, you only need to make one payment each month. When the loan amount has been paid off, you would have successfully taken care of all your debts and would not have to worry about any consecutive payments.

Lower interest rate: You can save a significant amount of money as this type of loan comes with less interest, especially when compared to the astronomical interest rates on credit card loans. With debt consolidation loan, you can save money not only on monthly payments but also over the lifespan of the credit.

Good credit score: Inconsistent payments compromise your credit score severely. If you manage to get your debts consolidated and stay on top of the monthly payoff, you can work towards rebuilding your credit score steadily.

End to collection calls: Often the failure to make payments on time leads to the creditor handing over the collection duty to agencies. It means that your phones start ringing more often with collection calls. It increases both financial and societal pressure on you. With a debt consolidation loan, you can put an end to such harassments.

Stress reduction: Can you imagine the peace when you know that you do not have to worry about paying off multiple loans, and when you are not disturbed by creditors’ call now and then? All you have to do is arrange for just one payment, on time, each month.

One fact to remember while trying to consolidate your debts with a new loan is that this borrowed sum is not exactly helping you get rid of your debt. You will still have to pay your dues; you will have to plan your finances efficiently, and you will need to be careful about not borrowing more. However, having to pay just one stipulated amount every month might make you feel relaxed. You are just shuffling the debt around to find a more manageable way to pay it off. Practicing discipline and avoiding any new loans until you repay the entire consolidated debt amount would indeed be wise. Try to reduce your expenses so that the need to borrow anew does not arise. In case of difficulty, you can always consult a financial advisor.