The debt consolidation loan is the process of combining more than two debts into a single debt. This process is often taken by people who are burdened with a high amount of interest. Multiple debts are combined into a single larger debt, usually with more benefits. Benefits include a lower interest rate, lower monthly payment, or both.
By debt consolidation, we can repay multiple debts with a single payment per month. Also, it helps to simplify the debt repayment along with saving you funds. It is a way to compare the various interest rates and also help to find one that suits you the best.
Why should you prefer debt consolidation?
The debt consolidation process allows you to combine two or more debts into a single monthly payment, simplifying your economy and make life easier. Consolidation leads to a lower interest rate on your debt, which is a long-term benefit.
Generally, debt consolidation is the best option for those who have a good credit score. A good credit score will allow qualifying for the most competitive interest rates on the consolidated debts.
Ways of consolidate debt
There are several ways to consolidate your multiple debts together into a single payment. A few of them are given below:
This way you can consolidate all your credit card payments into a new credit card. This is a good concept if it charges less or no interest for a set of periods.
It is used to combine credit card debt and is a way of changing multiple balances into a single monthly payment.
Home Equity Loans
These are another form of consolidation and are a type of consumer debt. Home equity loans or home equity installment loans are the difference between the home’s present market value and the mortgage balance due.
Advantages of Debt Consolidation Loan
There are several advantages of using a debt consolidation:
1. Fewer interest payments
Generally, personal loans have minimum rates of interest as compare to other types of loans in the market. The main reason to opt for debt consolidation is to minimize the total monthly payment. Only this achieve when you taking a loan with a comparatively lower rate of interest. This can help to save a huge amount of money.
2. Potential boost your Credit score
Your credit score is determined by various factors. Such as, if you pay your credit card dues on time, this will increase your score; this is an important factor that affects your overall credit score.
A debt consolidation loan can reduce the ratio of utilization of your credit, therefore which increases your credit score. A lower ratio contributes to a good score. A personal loan through debt consolidation leads to a positive effect but only if having a lower credit utilization ratio and correct timely payment.
3. Makes debt easiest for you
Consolidating multiple debts into a single piece of the monthly payment leads to reduce your financial stress. This will fix the pitfalls of your finances and combining your current debts makes your debts manageable and easier to a great extent.
Even though you have more than two loans, this can help you to pay off on time.
4. Gives you stress relief of mind
It is proven that when you are going for debt consolidation reduces your financial stress; it gives a peaceful mind and controls multiple payments at a time.
5. Fixed repayment timeline
When taking a loan, the customer agrees to repay that loan in a specified time as shown in the agreement. Understand that if you need to repay your loan early, your lender may require a prepayment penalty.
6. Lock in a low rate
Interests for different loans are different. This means that the rate of interest is depending upon a financial index. If your index rate is high, your rate of interest also high as well.
If you are fed up with owing money at variable rates, you can achieve a fixed rate of the loan; thereby you can understand the exact amount of monthly payment.
Disadvantages of Debt Consolidation Loan
There are also some disadvantages in debt consolidation that you should consider before taking out a loan.
1. Higher rate of payment
There is no surety in a personal loan have a lower rate of interest as compared to the entire loan that you have. If you combine your all debt with a lower rate of interest, you may increase the cost of repaying.
2. May increase your debt
If you take a debt consolidation without proper planning and research it can lead to a negative impact on your finances. This may happen only if you are not managing your current loan with a new one properly. For a successful consolidation, you should plan repayment properly before taking a new loan.
3. Not able to save more
Even though you have to save money in debt consolidation, you cannot trust blindly any debt consolidation. Compare all the variables and calculate the total borrowing cost. Then ensure the consolidation of your debts that are beneficial or not, after that choosing the best way.
4. Your assets may be at risk
Some loans such as personal loans may need to secure them. For a secured loan you have to put some assets as collateral against them. The lenders have the right to take away those assets if you are unable to repay the loan as agreed.
Debt consolidation is a good option only if you can manage your loans at a lower rate of interest and some favorable terms as compared to the loans that you are holding currently. Qualification for such a loan will depend upon your income, credit scores, and other financial details.