Everything you need to know about debt consolidation loans


Also referred to as credit consolidation loans, these are a type of personal loan that helps you pay your existing debts in a simplified manner by merging them into one payment that goes to one lender. Your credit score determines whether you qualify for a lower-interest or a high-interest rate loan. Depending on what you get, you can expect to save some money on your monthly payout and interest rate. 


Types of bills consolidation loans
Commonly, these kinds of loans are meant for unsecured debt, such as medical bills, payday loans, credit cards, and personal loans. There can be two choices in loans – secured and unsecured. Secured ones need collateral, and unsecured ones don't. Although the latter the option is quite popular with people, you can choose a secured debt consolidation loan also to pay off your credit card debt.
1.      Secured loans
These loans require collateral, such as a property, and offer excellent interest rates compared to the unsecured option. If you can pledge your home and fulfill all the pre-requisites, then go with this choice as it can save loads of your money on interest rates.
Typically, these secured loans are home mortgages that come at a fixed interest charge. The best part about them is that you can look for tax exemption on interest payment for these loans, unlike the credit card interest. The only risk is that if you fail to repay the amount, your home will be seized. The length of the repayment period can be ten years or more. By chance, during this period, if the valuation of your home slides, you may have to pay more than the actual value of your home.
2.      Unsecured loans
As hinted previously, unsecured loans are comparatively easy to get, and they don't need any collateral. You can get these loans from banks or marketplace creditors online. Because you can apply online, it becomes quite convenient for you to proceed with it. Some lenders process application requests quite fast, as a result of which, you also get to know it more quickly if the loan is right for you or not.
While easy availability and convenience are the two enticing factors about these loans, one thing that may prevent you from opting for them is their higher interest charge.
For elaborate information on debt consolidation loans, you can explore websites like Nationaldebtrelief.com.
Pros and cons of credit consolidation loans
Getting a debt consolidation loan can be a good idea as it can lower your monthly and interest rate payments and improve your credit ratings.
Pros
·         You can save on interest payment by opting for a lower-interest debt consolidation loan. Also, the repayment period for these loans is comparatively lesser than credit cards.
·         With this loan, you can organize your different debts into one payment and thereby, reduce the chances of missing payments. It will become easy for you to handle your monthly payoffs. That means you can look for relief from penalties and additional fees that add up on every missing payment.
·         You can see your credit score improving when you shift from recurring debt to installment debt. And if you don’t disturb your credit cards, the ratings will further grow to your benefit.
Cons
·         Your monthly payments may come down, but your interest payment can go up due to extended repayment periods.
·         If you fail to repay, you may have to lose your pledged property, such as a home, a car, etc.
·         Because your older debts are clear after taking out a debt consolidation loan, you can feel tempted to create new obligations on your older accounts.
Points to consider before applying for a debt consolidation loan
You cannot afford to be casual with your decision of taking a debt consolidation loan. There are several things you need to figure out before applying for one. Here is a quick rundown on this.
Look for alternatives
Check if you can avail zero percent balance transfer offers on your credit card or lower-interest loans from a credit union.
Plan monthly budgets and repayments
You have to know how you are going to deal with new payments, particularly when you failed to make your previous balance payments. Create a proper budget so that you don't face an issue of missed payments or default.
Take the stock of overall debt payments
Calculate credit card, student loan, car loan and other amounts that you need to make every month. Find out how much you spend monthly, and where you can curb spending. See what you spend and how much is your payment obligation to understand the total debt amount that you will be comfortable paying every month. This whole exercise will give you an idea about your debt repayment capabilities and to obtain a loan on favorable terms. In this context, it is essential to note that your new loan repayment amount will be determined based on your borrowed amount and the length of time of payoff.
Explore different avenues for options
Visit a few lenders for a debt a consolidation loan to make sure you obtain one on the best terms and interest rate.
Choose a trusted lender
An ideal way to eliminate debt is by getting a debt consolidation loan. But, the rising demand for these has led to scams and fraudulent schemes in the market. To avoid getting trapped in any such situation, you should approach only well-established and reliable creditors. Don't be tempted by the quick-fix promises. Some lenders can ask for upfront payment without approving your loan. Be wary of them. You don't have to pay anything upfront without getting the loan.
Avoid the temptation of creating a new debt
Since after taking a debt consolidation loan you can begin with a zero balance on your credit cards and other financial obligation, it may look enticing to you to use these new accounts for household expenses. Don't fall prey to this as you would not want to create history again and also add a further financial liability over and above the debt consolidation loan.
Once you are sure about all these factors, you can go ahead and apply for a loan. For obtaining it, you need to maintain a FICO credit score of 580 to 739 - the higher, the better.


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