Everything You Need to Know About Debt Consolidation Loans
There are many types of debts, such as student loans, doorstep loans, credit cards, auto loans etc. and keeping track and paying all of them at once can be difficult for the borrower.
If you think of consolidating all of them in one, it will help manage your debts and streamline your finances.
It will help you in debt management but will it end your financial problems? Make an informed decision before consolidating your debt, as there are two sides to it.
Be informed about debt consolidation
Debt consolidation loans are borrowed to pay off your multiple loans hanging at one time. The interest rate is lesser than your existing loans but is it a solution to your loan problem?
Look into both sides of debt consolidation before you plan to consolidate all your debts. Many borrowers prefer consolidating their debts, while some may not prefer. It totally depends upon the financial situation of an individual.
Debt consolidation loans depend on the types of lenders. Some lenders offer you specialised debt consolidation loans, while others may pay off on your behalf. Some of the lenders disburse the amount to let the borrower pay themselves.
Advantages of debt consolidation loans
- Streamlines your finances
With debt consolidation loans, you can streamline your finances. You can combine all your existing loans and reduce your number of payments. This way, you do not have to worry about the interest rate.
Going for debt consolidation loans also helps in reducing the scope of late payments. With payment in the pipeline, there are fewer chances of missing the payment. This may also help you to lead a debt-free life if you pay your debts sincerely.
May speedup the payment process
Suppose your debt consolidation less is offering you lesser interest as compared to other existing loans. In that case, you can think of consolidating your loans and make extra payments with money you are saving extra month.
This will speed up your payment process and make you debt-free sooner. It will save you from hefty interest rates in the long run. Debt consolidation loans extend your loan term.
Hence, to reap the benefit out of it, you have to plan to make your debt payments early.
Makes the Could Lower Interest Rate
A compared to other available loans, you may have a chance to lower down your interest rates by applying for debt consolidation loans.
If you are making your payments regularly, this will also increase your credit score. A lower interest rate may lead to your money-saving on your loan if you do not consolidate for the long term.
To get the best rates in the market, it is important to research and shop around and get the best rate possible. One tip to get the best loan is to look for lenders that offer you a prequalification process for a personal loan.
The interest rate depends on the type of loan, and some may have higher interest rates. For example, student loans have a lower interest rate as compared to credit cards.
If you are consolidating all your loans, there are chances that the interest rate offered to you may be higher than some of the debts but lower than others. While opting for this, your focus should be on overall savings and not individual loans.
Reduce your monthly payments
With debt consolidation, there are chances that your monthly payments will be reduced as the new loan is spread over a long term as compared to your existing loans.
This can prove to be beneficial for you as you may pay for a longer duration but with a lower interest rate.
Improves your credit Score
Debt consolidation offers you another benefit of improving your credit score. Although there may be a temporary decrease in your credit score, it will eventually result in a good credit score.
Along with this, paying off your debts sooner and on time will also help you in improving your credit score.
Disadvantages of Debt consolidation
With pros, there are a few cons and risks too for debt consolidation loans.
May have added costs
Although there are benefits of debt consolidation loans, they may have certain risks too. Certain additional fees, such as origination fees, annual fees, balance transfer fees, closing costs, etc., may add up to your debt consolidation loan amount.
While selecting a lender, always analyze and understand the true cost of your debt consolidation loans. Once you are sure of the lender and the fees involved, only then go for it and make it a deal.
May increase the interest Rate
In the case of a good credit score, a debt consolidation is a good option. But in case of a lower credit score, you can face a higher interest tare with debt consolidation loans, you won be having access to the competitive rates in the market.
You may be stuck with a higher interest rate as compared to your existing one. This may make you pay more over the life of the loan.
More interest during the loan tenure
Despite a lower interest rate on your debt consolidation loan, you still have to pay more interest rates during your loan tenure. The timeline for your loan is up to 7 years.
You may be used to paying off a lower interest rate, but it will have a higher interest rate with a longer time. There may be a reduction in your monthly payments but with the high rate of interest.
To resolve and manage this issue, you can create a budget for monthly payments exceeding the minimum loan amount. This will help you to borrow debt consolidation loans, reducing the added interest.
You may miss making payments
If you miss a payment on your debt consolidation loans, it can cause severe damage to your credit score along with an additional fee.
To avoid such a situation, you may review your budget and take advantage of the auto-pay facility for your debt consolidation loan.
If you feel that you can miss any payments, inform your lender beforehand to avoid any problem for you.
Doesn’t cater to underlying financial Issues
Debt consolidation loans can help you ease your payment pressure and simplify things for you, but it does not solve your underlying financial issues.
There are many instances where people borrow debt consolidation loans and find themselves stuck in a debt trap as they cannot curb their spending and keep on building their debt.
So, if you wish to become debt-free, practice healthy spending habits and see a difference. Alternatively, you can look for small borrowing like doorstep loans. These funding sources do not put extra burden on your finances.
If you want to simplify your financial complications or want to go for a lower interest rate, debt consolidation loans are the right option for you.
Debt consolidation may provide you with immediate benefit only when you take care of all the underlying issues attached with it. Along with all the considerations, you have to plan out effectively to pay off your new loan and become debt-free as soon as possible.