Debt Consolidation Loan: Understanding Your Options

Posted on September 20, 2021 in Debt

When looking for the best debt consolidation loan, look for the lowest interest rate, a loan amount that meets your needs, an affordable and manageable repayment term, and little to no fees. You should evaluate top lenders by factors such as APR, loan amounts, fees, credit requirements, and broad availability. Read on below to find out what a debt consolidation loan is, how they work, and if one may be right for you.

At some point in life, you may have borrowed some money and failed to pay back or overspend, particularly on your credit card, resulting in debts. According to research, 77% of American households are in one type of debt or another, meaning if you’re in debt, then you’re not alone.

While the same research indicates that the percentage of households in debt has been decreasing since 2016, paying off these debts is never easy for most people, especially those who are not aware of the best ways to get out of debt.

If you find yourself in debt, worry not because there are several cheap and easy means of paying off your debts. This guide will discuss debt consolidation loan, which is an inexpensive way to get out of debt. Read on to find out how it works, the risks and benefits involved, and the companies that can help you in securing a debt consolidation loan.

What is a Debt Consolidation Loan?

Debt consolidation is the process of combining multiple debts and paying them as one huge debt. For the most part, this plan provides favorable terms of payment. It results in lower monthly interest rates, which translates to reduced monthly payment amounts and, therefore, a more attractive way of paying off debt.

How Does a Debt Consolidation Loan Work?

A debt consolidation loan is a type of personal loan that allows you to combine several high-interest debts into a single new loan with one monthly payment that is usually at a lower interest rate. As a result, managing your outstanding debt becomes easier, and you’ll be in a better position to pay it off. Ideally, you combine all the debts into one and acquire a personal loan to pay off the combined debts with one fixed interest rate.

To get a debt consolidation loan, you have to calculate the total amount of debt you owe. The figure will guide you on how much money to borrow. If your loan gets approved, you can use the money to pay off your debts.

Some debt consolidation companies prefer paying the loan directly to creditors. In turn, this helps in managing your funds to avoid defaulting payments, going into other debts, and winding up with a negative bank account balance. After paying your creditors, you’ll be required to make monthly payments on your debt consolidation loan.

Why Should You Consolidate Your Debt?

Debt consolidation may not be your best option for solving financial challenges, but it has its fair share of merits that you cannot ignore. Consolidating your debt helps you to pay off your creditors sooner. This saves you from incurring extra costs due to the ever-increasing interests.

Some debt consolidating companies also offer financial advice on how to manage your debt after debt consolidation. Such advice will ensure that you do not repeat the same financial mistakes, and keep debt and credit card balances at bay for good.

When looking at debt consolidation, think about the interest rates of your debt. Multiple interest rates, when accumulated, cost you a lot of money.

A debt consolidation loan allows you to consolidate your debts and pay them sooner at a lower interest rate. And since the loan has lower interest than the debts, you will ultimately pay a reduced amount of money at the end of the loan payment.

Moreover, one of the key advantages of a loan is that it will help you manage your finances better. As mentioned earlier, some companies prefer paying your creditors themselves. You will not even notice how quickly your debts will be paid.

Another top benefit of a debt consolidation loan is the positive impact it will have on your credit score. Credit utilization ratio is the amount of credit you have used. When you consolidate your debts, you hardly use your credit, which will lower the credit utilization. A lower credit utilization is a positive aspect for your credit profile and can result in an increase to your credit score.

However, you must understand that you will affect your credit scores if you default on loan payments or make late payments. So, always commit to paying your new debt consolidation loan early to have a good credit score.

Is a Debt Consolidation Loan a Good Idea?

Debt consolidation may not be a good idea for everyone. Before taking this route, you need to look at your situation and determine whether you will benefit from the process by getting lower interest rates. Otherwise, you will incur extra costs, including fees and higher interest rates, which can put you in a worse situation.

If you already have a low credit score, a debt consolidation loan may not be a good idea. Only those with high credit scores are likely to get a reduced interest rate.

If you are not able to pay off your debts, getting a loan may put you in a worse situation than before as you may end up defaulting on the loan. As such, its better to look for other means to pay off your debt rather than a debt consolidation loan.

If you like to pay your debts with a fixed option, a debt consolidation loan is a good option. You can benefit from the low-interest rates and still get to pay your debts with a fixed monthly payment. Read more about if a debt consolidation loan is a good idea for you.

Qualifications for Debt Consolidation Loan

The qualifications to acquiring a debt consolidation loan may vary depending on the financial institution. However, there are some basic requirements which apply to all:

  • You should be above 18 years of age
  • You should not be bankrupt
  • Must be a legal citizen of the United States

Besides the basic requirements, most lenders prefer a credit score of more than 600s. The debt-to-income ratio is also essential and should be below 45%. The debt-to-income ratio is the amount deducted from your gross income to repay your loan.

If your credit score does not look good, don’t despair. You can work to fix your credit yourself before pursuing a loan option and repayment term. Otherwise, there are lenders who are willing to give you a loan though at a higher interest rate. So always ensure you pay your loan on time to have a good credit score.

How will debt consolidation loan affect my credit score?

At first, debt consolidation will affect your credit score because will carry out a hard credit inquiry before giving you any financial assistance. However, if you make your monthly payments on time, your credit score will improve while late payments will hurt your credit even further.

If you take a personal loan to pay your multiple loans, your credit score will not be affected. This is because personal loans are fixed loans so you make fixed monthly payments  and have a fixed payoff date.

Debt Consolidation Loan vs Balance Transfer Credit Card

Balance transfer credit card allows you to transfer your credit card debt to a new card. It’s recommended to shift your debt using a 0 percent balance transfer credit to avoid incurring any additional interest.

Unlike debit consolidation loan, using balance transfer credit card will not lower your credit utilization ratio.

Best Debt Consolidation Loans

Alternatives to a Debt Consolidation Loan

While debt consolidation loans are a great option for settling debts, they are not necessarily perfect for everyone. There are always many other better options that you might consider to repay your debt besides debt consolidation loans. For example, you may wish to compare debt consolidation vs. debt settlement. Below are some alternatives to debt consolidation loan:

1. Home Equity

Home equity is one of the methods you can use to pay off your debts. Your lender gives you the required funds in exchange for the equity in your home as collateral. Defaulting your payment could make you lose your home.

2. Credit Counseling

Credit counseling companies are mostly non-profit organizations that offer services such as debt management plan and debt counseling. When you choose this option, you’ll be required to pay a single payment to the credit counseling company which then divides the payment to pay your debts.

These companies will negotiate for low interests on your behalf to enable you pay your debt faster. As such, these services are not free. You may have to pay a monthly fee of about $20-$75 and a setup fee of  between $30 and $50 for a period of 3-5 years.

3. Debt Relief Services and Consolidation Loans

There are companies that offer debt relief services. These companies reach out to creditors and help you negotiate for better settlement terms. Some of them offer financial advice on how to pay your debts. Below are examples of companies that offer debt relief services:

Turbo Debt

Turbo Debt is a company that will help you settle your debts easily. This company gets in touch with your creditors and negotiate better payment terms. Besides the negotiating services, the company teaches you how to manage your debts and finances. Get your free debt relief quote today.

ClearOne Advantage

ClearOne is a company that will help you make payment plans to enable you settle your debts quicker. The company offers you a personalized payment plan that will direct you on which debts to settle first.

However, there are some limitations to seeking their services. The company requires you to have at least $10000 in debt and you must pay a fee of 25% of your debt amount.

Beyond Finance

Beyond Finance provides clients with a personalized payment plan for paying off their debts. The company evaluates your debts and helps you to come up with better means of paying them. They may also give you a debt consolidation loan if your credit score is great.

Debt Solution Network

Debt Solution Network offers you debt consolidation loans and helps reduce your debt by about 50%. With the help of the company, your can have a better credit score within a short time.

FAQ’s About Debt Consolidation Loans

What is a debt consolidation loan?

A debt consolidation loan is a low interest rate loan that allows you to combine multiple debts and pay them as one huge debt which results in reduced monthly payments. Loan funding and term length will vary, so be sure to check your rate and do your research before committing to a debt consolidation loan that’s right for you.

How do debt consolidation loans work?

You can ask for a loan at a financial institution or a debt relief service company. This debt consolidation loan is used to pay off other debts. You will then make monthly payments at the agreed interest rate to pay off your consolidation loan. Be sure to look into different rates and terms that work for your personal finance situation, and find out how to qualify for the lowest rate.

Does a debt consolidation loan really work?

Debt consolidation is a good idea for those with a good credit score and those who qualify for low interest rate loans. The method helps you to pay off your debts quicker and at low interest or fixed rates.

Are debt consolidation loans bad for credit?

At first, a debt consolidation loan may harm your credit. This is because the lender conducts a hard check to know all about your debts before approving the loan.

How can I get all my debt into one payment?

Debt consolidation allows you to combine all your debts  into one huge debt for one easy payment. Combining several debts into one makes it manageable.

How can I get a debt consolidation loan?

There are several companies and financial institutions that are willing to give you a debt consolidation loan as long as you meet their debt relief qualifications. Companies such as Beyond Finance and Turbo Debt are known for giving debt these types of loans.

Do debt consolidation loan hurt your credit?

Debt consolidation can hurt your credit, but that may be temporary if you make your monthly payments on time. Over time if you continue making your monthly payments on time, consolidation loans can improve your credit score.

Debt Consolidation Loan Final Thoughts            

It is normal to borrow money, but you should learn how to manage your finances to avoid falling into deep debts. There are companies willing to offer you debt relief services but you ought to be careful and review them before taking any step.

Debt consolidation could benefit you as long us you understand the terms of payment and the lender. It is about time that you became responsible of your finances.

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