When you have debts with high-interest rate, such as credit cards, sometimes it can be so harsh to pay them off at once to clear them all. It becomes especially difficult if you have high balances and you are already paying lots of bills every month. It’s the time when you needs a solution to get rid of high debts. A debt consolidation loan could be the solution you need.
This article explains what a debt consolidation loan is, how it works, and everything else you need to know about consolidating your debt.
What is a debt consolidation loan?
A debt consolidation loan is a personal loan that you use to pay off other existing debts such as high balance of credit cards you have. This loan helps you to roll multiple bills into one affordable and easy monthly payment. The main goal of a consolidation loan is to reduce the interest rate applied to the balance amount. That allows you to pay off all your debts more efficiently, saving time and money.
How a debt consolidation loan works?
- You apply for an unsecured personal loan called ‘Debt Consolidation Loan’.
- After approval, the applied amount of funds are disbursed to your personal bank account.
- Then you use this amount you receive as loan to pay off all your debts including credit cards and other unsecured debts.
- As a result this leaves only the loan to pay off so you can become debt-free.
Types of debt you can consolidate
Basically, a debt consolidation loan can be used to consolidate almost any type of unsecured debt. This can include:
- Credit cards
- Store credit cards and in-store credit lines
- Unsecured Lines of Credit (LOCs)
- Unsecured personal loans
- Collection accounts
- Unpaid tax debt
- Arrears for child support or alimony
- Student loans
You can generally not consolidate secured debts, such as mortgage and car loans.
Advantages and Disadvantages of Debt Consolidation
Debt consolidation offers several advantages:
- One easy and affordable monthly payment for all your debt
- Fixed monthly payments
- A set payoff date for your debt
- A very affordable and lower, fixed interest rate
However, there can be some disadvantages as well, depending on your financial situation:
- If you start with new credit card balances before you pay off the consolidation loan, you can end up with more debt instead of paying your previous debt off.
- Getting the low interest rate you need for the consolidation loan to be beneficial can be dependent on your credit score. However, your Personal Loan guide assistant may be able to help you find a lender willing to offer you a lower rate even if you have more credit challenges.
Choosing the right term when you consolidate
When you receive a debt consolidation loan, you will choose a term for the loan called ‘amount of time’ you have to repay the loan. Loan terms can start from 12 months to 60 months.
Choosing the right term at this stage is important, since it will affect two major costs with your loan:
- The monthly payment amount
- The total cost to pay off your debt
If you choose a shorter term to pay off your loan, the monthly payments will be higher with lower total costs. And if you choose a longer term; the monthly payments are lower with higher total cost.
Before deciding the subject term for your loan, carefully review your budget to calculate / determine the monthly payment amount you can comfortably. You want to choose a term or time frame that provides a payment not stressing your budget but will get you out of debt in the shortest possible time.
Understanding the cost of a debt consolidation loan
Getting rid of debts will always come with some cost, but if you compare it with other solutions in the market, a debt consolidation loan can the best and most affordable to get out of debts.
Mainly debt consolidation loans have two key costs you need to know before you apply:
1. Fees 2. Interest charges
Some loan lenders or banks will charge a startup fee for setting up your consolidation loan. It normally range from 0.5% to 8% of the total amount borrowed. This fee is rolled together with the loan amount and repaid with your monthly loan payments.
You needs to know, if you do not make a payment by the agreed due date there also may be late fee applied. Always make sure to pay your monthly loan payment before agreed time to avoid late fee.
Also, carefully read your consolidation loan contract to see if the loan will have any early repayment or prepayment fees. These type of fees may apply if you try to pay off the loan earlier than the contract period. If possible, avoid loans that charge these types of fees.
2. Interest charges
Your consolidation loan will have a yearly interest rate, which can guide you calculate the yearly cost of your loan including interest rate. For example, a $10,000 with a 5% yearly interest rate would cost approximately $500 in interest charges in the first year of repayment.
This may seem high, but if you compared to annual interest charges on the same amount on a credit card, you will find it relatively low.
Also, keep in your consideration that a consolidation loan will help you to pay off the balance even much faster than minimum monthly credit card payments.
How Personal Loan Specialist helps to get debt consolidation loan easier
Debt consolidation specialists are there to help you in getting a consolidation loan easy and affordable. Usually, first they provide a consultation to talk about your needs, budget, and targets. That way, they understand well and guide you for a loan for getting out of debt in the most efficient way possible.
How to avoid it in future
In order to avoid such loans and practices in future, it is worth considering understanding the main reasons of such balance first, whatever it may be.
In most cases, this is a change in habits such as control the spending and saving more. And in some cases, it may be a learning how to live within or below their budget. In some cases, it can even be looking for a higher income to manage the spending. These are few examples that will be more effective in the long term to stop such debts.
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