Debt consolidation is a way to manage your unsecured debts into one monthly payment by using different financial services like personal debt consolidation loans or credit cards. Smart debt consolidation strategy can lower your interest rates, make is easier to track and manage monthly payments as well as pay out the debts quicker. Another possible benefit of consolidating your debt is that it can improve your credit score.
What are the Best Debt Consolidation Loans?
Taking out a personal online loan to consolidate debt and unite several smaller debts into one is the most popular option among borrowers who have good or bad credit score. In most cases this type of online loan requires no collateral and is paid out in monthly payments, which makes it much easier to control your debt and payments and this is why many vote for it as for the best debt consolidation loan.
Debt Consolidation Loans and Bad Credit
As for credit score, the general rule of thumb is that better credit history gets you better APR (Annual Percentage Rate) and terms, while some lenders may even refuse to provide a debt consolidation loan to people with very bad credit score. In some cases taking a personal unsecured loan to consolidate your debts, like credit card debts, can help you improve your overall bad or fair credit score.
What are the Requirements for Debt Consolidation?
In general lenders require that the borrower is at least 18 years old, has a valid and verifiable bank account, can provide a valid personal ID, is a US resident and is not in bankruptcy.
There may be other requirements depends on your state or lender you select.
What Happens if You Opt for Debt Consolidation Loan?
If you take a debt consolidation loan, you are paying off all your loans by taking one big online loan. This way you are not dealing with multiple lenders or credit card debts. Instead, you are paying only one EMI to a single lender or a financial institution.
- Reduce the number of EMIs.
- Pay only one EMI
- Deal with only one lender
- Money against loans is debited only once a month and not multiple times
Types of Debt Consolidation Loans
There are numerous types of debt consolidation loans to choose from. These vary from taking a new credit card to pay off outstanding on other credit cards to even taking a loan against the value of your house.
Balance transfer on credit cards
- some credit card offer promotional events when the interest rate is 0% for a limited time. In such cases it might be wise to use this option to consolidate debt.
Personal loan for debt consolidation
- by far the most popular solution for those looking to consolidate all current loans & debts into one.
Home equity loan
- if you are a homeowner then this option may be available, but keep in mind that failid to pay out such a loan may lead to serious problems.
Advantages of Debt Consolidation Loan
There are many advantages of opting for a single loan against multiple loans. Take one big loan and write off your multiple debts. It is very beneficial for those people who are burdened with paying EMIs multiple times in a month to different lenders. Juggling many payments can be very stressful and may also be very expensive since the interest charged by different lenders varies.
- Clear all credit card dues.
- Save on interest.
- Improve your credit score which will help in acquiring a new loan in the future if required.
- If repaid with discipline, it can make you debt-free sooner than you thought.
Disadvantages of Debt Consolidation Loan
While the rate of interest and outgoing per month may reduce when you take a debt consolidation loan, remember the savings in your pocket may not be as attractive as you think. This is largely due to the fact that your prepayment timeline increases. Similarly, by availing a big loan the total credit available also reduces. So when you go for a new loan your eligibility comes down. Also, note that many debt consolidation loans demand high monthly and additional processing fees.
- Overall outgoing may increase on account of the increased loan tenure.
- Credit eligibility reduces. This will be a huge disadvantage when you require a new loan.
- Lenders charge a processing fee or additional charges, something the borrower would have already paid while taking all the previous loans.