information on using debt consolidation loans.
Find how using a debt consolidation loan will help improve your household’s financial situation. There are a number of banks, non-profit organizations, and even “non-traditional lenders” that can provide funds. The reason for using a debt consolidation loan is so that the money from the new loan (which will have a lower interest rate) will pay off/consolidate other bills or debts that have a higher interest rate. Then, going forward, the borrower will have a lower monthly payment that they need to make.
What exactly is a debt consolidation loan?
At the end of the day, it is the process of obtaining a lower interest rate loan to pay off your financial obligations. A personal loan used to consolidate debt is a source of funds that is offered by many online banks, credit unions, “traditional banks”, credit card companies themselves, etc. Those lenders will issue a low interest rate loan that is used to pay off some or all of your other outstanding debt - whether a credit card balance or something else. You would use them for any obligations you have that have a higher APR.
The “new money” you borrow will combine all of your outstanding debts, including medical, automobile, as well as credit card, and it replaces them with a single loan. In order for this to be an effective solution the new loan needs to be issued at a lower interest rate, even if it is just a slight difference. The lower APR is what allows the borrower to save money and it but one credit card company assistance program. Another reason to try this is that there is usually no cost to finance the debt at a reduced interest rate.
What are the main advantages of using a loan to consolidate debt?
Since typical loans are fixed-rate, you'll be able to determine how much you will pay each month for a specific time period. Each and every one of these lenders has a free calculator you can use on their website to determine how much money you will save per month as well as per year. The loan payment amount will not change, and you'll know the latest date when the debts will be paid off. A loan for consolidating debt will assist you in paying off all types of creditors, including medical bills and credit card debt.
By taking out a loan with a lower interest rate than most, if not all, of the debt you want to pay off, you can save hundreds or thousands of dollars in interest payments and fees. Of course the exact savings depend on the terms of the loan you want to consolidate. In many cases, the combined debts will be paid off sooner than if you had continued to pay each debt separately.
It simplifies your monthly payments. Instead of someone needing to make multiple payments to multiple creditors, you will have only one payment to make every month. This will help you in managing and controlling your finances, and it will reduce the chances of late and/or missed payments. There should be less stress in dealing with just one creditor, and not multiple creditors.
By leaving paid-off accounts open, your credit score will improve as your credit utilization ratio changes. Lower credit card balances result in having more credit available which is a key component used to determine credit scores. You'll make your life simpler by just remembering one monthly loan payment date rather than keeping track of multiple payment due dates.
To get the full benefit of a debt consolidation loan, avoid making late payments or acquiring substantial new debt using the credit cards you have paid off. This is always to best way to make them as effective as possible. When used properly, debt consolidation loans provide an excellent method to significantly improve your overall financial health in a relatively short period of time.
There are a whole host of other options out there as well if this is not a good fit. Compare debt settlement vs. debt consolidation.
What are the big disadvantages of consolidating debt using a loan?
Most loans used as a form of consolidation of your bills will involve a longer repayment period, which can be a negative as this means the principal balance paid over time can be higher though it should be offset by lower interest rate costs. While a debt consolidation loan will allow you to lower your monthly installments and interest rates, you will end up paying the outstanding debt over a longer period of time.
For a secured loan, you will have to pledge assets like your home or car. This can obviously add a new level of risk. Any consumer thinking of this option should really explore all alternatives first. So these are higher risk in that if you have a secured loan, and do not make the payments on it, you might lose your assets.
While it can help pay off your debts, it does not stop the borrower from taking up multiple loans again. Or it does not stop them from spending excessively. Too many people often end up in financial trouble again in a few years. It will not fix bad spending habits. After all, doing that is key to develop a budget or spending discipline.
Since there are risks, it is sometimes a good idea to talk to a non-profit credit counseling agency before consolidating any debts with a loan. Or find the best do it yourself ways to consolidate credit card debt.
What are some of the types of loans to use to consolidate debt?
They can be either secured (less common) or unsecured loans (which are common). There are major differences between the two. If you have a secured loan then you will have to place collateral with the bank or lender in order to borrow money. They will in effect force the borrower to do this in order for them to take out the loan. Many borrowers will use their home or even a vehicle as security. So borrowing money in this fashion obviously tends to be higher risk and consumers should be very cautious before deciding to take out a secured loan. Most banks and lenders do offer various resources though, and find the best debt consolidation loans and lenders.
 On the other hand, using unsecured loans to consolidate any debts does not require the borrower to use any collateral. So these come with much less risk. They are often the better option; provided the interest rate is competitive. These loans are based entirely on the capacity, past payment practices and the character of the borrower to repay the loan.
Some people can even in effect create their own bill or debt consolidation loan by rolling over all of their outstanding financial obligations into a low interest rate credit card. A con to this approach is the borrower needs to only use the money for that purpose, and not for shopping or pay other living expenses. So they open a new account and then transfer the balance to the new credit card.
It is possible to get a loan to consolidate debt from a credit card issuer as well. Many companies, such as Bank of America as well as Citi, offer products to their current customers and are focused on helping people pay off their credit card bills. Find out how to get a Bank of America debt consolidation loan. Citigroup, sometimes still referred to as Citibank, also provides their own loan product and they also provide free counseling services as well as financial empowerment services and find information on Citibank debt consolidation loans.
Many medical professionals, doctors, and hospitals will work with patients as well as they do not want the bad publicity of forcing a sick person to go bankrupt. Medical providers often offer medical debt consolidation programs as well as other options to help patients manage their debt. Learn more on medical debt consolidation.
Peer to Peer (P2P) lending sites, such as Lending Club, and Propser offer a way for borrowers to get access to lower interest money. The funds can be used for many reasons, including to consolidate and pay off credit card debt, access loans for home mortgage payments, student bills, and auto loans. So this is a form of “non-traditional” that provides people another way to consolidate their debts. More on peer to peer debt consolidation.
It is also possible to consolidate payday loan debt. While it can be more challenging as most borrowers have bad credit scores, there are also non-profit as well as private companies that can help. Learn more on consolidation payday loans.
Is using a loan to consolidate my unpaid bills right for me?
If you have some or all of the challenges listed below, then probably yes. If you are not certain, then talk to a non-credit counseling agency for advice. More info on non-profit credit counseling.
- The current debt you have on your various account(s) has different interest rates at a higher level. It can help people who would like to have one interest rate, usually lower, for all your debts.
- If you are currently paying multiple loans for different expenses from different lenders and area having problems in staying organized and paying different creditors at different dates.
- You want to reduce how much you pay on interest each month to service your various your debts.
- If your other loans you want to consolidate are adjustable rate products where the cost of financing can increase or change drastically.
You need to take advantage of the lower interest rates to pay down your principal. In order for this tactic to work for your situation, you need to pay the money you borrowed in full and on time. Another key is you have to find ways to cut back on your expenses, and it is imperative to limit excess spending. If you do not take those steps then the con of this approach kicks in, and you can just fall behind again in the near future.
Another technique gaining traction is debt settlement. A pro for this type of program is that it can also be combined with a consolidation loan to provide more relief in a shorter period of time, This is the practice of eliminating debt by negotiating with your creditors and it can also help individuals address the principal due. Read more on debt settlement options.
What do I need to have to qualify?
Each lender will of course have private criteria. This means that one bank or lender may deny an application, but maybe another will process it. So you often need to contact different companies to apply. But in general, some or all of the following may be true.
- You must have a fairly steady source of income.
- A lender may require a copy of your monthly budget, including all income and expenses, to determine if you can meet your loan payments.
- A bank may review your credit scores and ratings. The better those scores are the better chance you have to secure a loan. There are some online lenders that provide unsecured loans to applicants with lower credit scores so it is possible for various people to get some type of money to consolidate their debt(s).
- Some lenders may need a consignor for the loan.
What should I consider before agreeing to a debt consolidation loan?
You need to verify several things. In addition to potentially talking over your situation with a credit counselor, some additional items to consider before taking out debt consolidation loan include the following.
- The interest rate: This is probably the most critical piece of information. Lenders will charge a variety of interest rates to different applicants based on their FICO scores, income and other factors. They use different formula and equations to determine this. So “shop” around for the best terms. In general, the interest rate on a secured loan will be lower than the interest rate charged on the unsecured loan. You always need to review the rates on any potential loan. In addition, review all of the fees, prepayments terms, and conditions. Focus on the “fine print” too.
- Fees charged: Do not select a lender that charges high fees before providing any services. This includes everything from origination to pre-payment costs. All fees can quickly add up. Also consider whether there is a penalty for paying off the loan early, as the top lenders or banks should not charge you a repayment fee
- Carefully consider origination fees to get the best deal, as there are some that can often run as high as 8%. The fees in effect reduces the amount of money you will get from the lender. If you take out a $10,000 loan with an 8% origination fee, you will only receive $9200 and be expected to repay $10,000 plus interest.
- Monthly repayments: Ensure that the amount you need to pay each month is lower than the amount you are currently paying before the consolidation. If you will not save money each month, then it probably does not make sense to proceed.
- Review your current financial obligations: Be sure to take a realistic look at the total amount of debt that you owe. Review all of your accounts and financial commitments, including car payments, credit card debts, utility bills, medical expenses, etc. Determine exactly how much you can borrow as you try to consolidate debts with a loan, and take a conservative approach in doing those calculations.
Bottom line on using a new loan to consolidate debts
When used correctly the concept of using a loan at a lower interest rate (and lower overall cost) to pay off/consolidate other debt will work. It will allow you to start tackling your debts aggressively, however it is extremely important that borrowers also need to develop a plan, such as a monthly budget, to ensure their finances are in better shape over the long term. You will not be successful if you just roll your debt over into a new lower interest rate loan and do not pay it off aggressively or address other financial challenges.
Related Content From Needhelppayingbills.com
|
