Debt Consolidation Loans
Many people often have to deal with multiple liabilities such as credit card debts, student loans, and plenty of other short-term obligations. Each of these will have different payment due dates along with different interest rates, which can complicate your finances.
Keeping tabs on the various due dates can be difficult. However, by taking a personal loan for debt consolidation, you can combine all your liabilities and multiple debts into a single monthly payment, reducing your complication and monthly expenses. One major benefit of consolidation loans is that the total monthly interest could be lower than the combined interest paid on the existing short-term debts.
What is a Debt Consolidation Loan?
A debt consolidation loan is an unsecured personal loan available to borrowers with a fair or better credit score. The borrower uses the loan to pay off debt from multiple credit accounts to remain with a single, easier-to-manage loan. The best debt consolidation loans will normally offer a shorter repayment term and a lower monthly payment.
Should You Use a Debt Consolidation Loan?
Taking a personal loan for debt consolidation may be a good idea in certain situations, but not necessarily every scenario. You can access the best debt consolidation loans if the total from your multiple debts does not exceed 40% of your gross income. Your income should also cover paying the installments for your loan consistently, and ideally your credit score should qualify you for either a 0% credit card or a loan with low interest.
Still, using a debt consolidation loan is not a good idea if you have too many debts whereby taking another loan will not repay all your existing debts. Avoid taking a personal loan for debt consolidation if you have excessive spending habits and the total debts exceed 50% of your gross income. Instead, take measures to improve your spending habits that created debt in the first place. In such an instance, try using proven debt management strategies such as the debt avalanche or the debt snowball method.
You don’t always need to use a debt consolidation loan if your loan amounts are small. Chances are, if you have a consistent repayment history, you can readily pay off existing debts by maintaining your current repayment pace.
Pros & Cons of Debt Consolidation Loans
- Personal loan consolidation makes it easier to manage debt.
- Debt consolidation loans usually have a lower APR compared to credit cards.
- The best debt consolidation loans have lower monthly interest payments than the total interest of the existing outstanding loans.
- Debt consolidation loans pose less risk of damaging your credit score.
- Interest on debt consolidation loans may be tax-deductible in certain circumstances.
- There is no risk of asset loss with an unsecured debt consolidation loan.
- Some debt consolidation loans may have prepayment penalties.
- They are not a solution for poor money management.
- Secured debt consolidation loans carry a risk of asset loss.
- Borrowers with a low credit score may find it hard to secure a personal loan with low interest.
How To Qualify for a Debt Consolidation Loans
Debt consolidation loan companies base loan qualification and approval on the credit score. There are a few methods, however, that can improve your likelihood of approval:
- Improve your credit score by paying monthly debts before the due date. You can also lower your credit utilization rate by paying down your credit card balance, which will help boost your credit score.
- Do not settle for the first personal loan offer you receive. If you are searching online, carry out a soft credit check and compare rates from different lenders. In addition, read the fine print and compare the terms and fees.
- For borrowers with a poor credit history, getting the best personal loan for debt consolidation can prove difficult. This is because most debt consolidation loans are unsecured. Consider applying for a secured loan. It is much easier to get approved and generally features a better interest rate.