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Debt consolidation

What is a debt consolidation loan?

Paying off pending debts by using a personal loan provided by a financial institution or a lender is called paying with a debt consolidation loan. The debt consolidation loan combines all of your multiple debts and replaces them with a single loan. A debt consolidation loan is one of the viable solutions that offer debt relief to people who find themselves financially-challenged.

What are the different types of debt consolidation loans?

The two types of debt consolidation loans are secured or unsecured loans. A secured debt consolidation loan means that you are obliged to place collateral to obtain the required loan amount. Generally, homes are used as security or collateral against the loan. Unsecured loans do not require collateral, and are based entirely on the character and capacity of the borrower to repay, based on acquaintance and history.

Are you a candidate for debt consolidation loan?

If you answer yes to the following criteria, you should consider debt consolidation loans.

  • If you have multiple loans from different lenders and if sending checks to different creditors at different dates is a problem.
  • If current payment plans are challenging.
  • If existing debts are accompanied by different interest rates but you would rather pay a single interest rate for all.
  • If you want to reduce the amount of money that goes towards monthly repayments.
  • If you are a homeowner and want to gain more leverage from your residence's value to pay off your credit card bills, store card bills or any other kind of debts.
What are the advantages of debt consolidation loan?

  • Debt consolidation loan saves you from paying high monthly bills and high interest rates. A practical way to consider the benefits of a debt consolidation loans is to review the Annual Percentage Rate (APR) offered.
  • A debt consolidation loan helps you to pay your existing debts.
  • Instead of making multiple monthly payments you have only one payment to make every month, which in turn helps you to manage your finances more easily. Also this reduces the chances of missed and late payments.
  • Dealing with one creditor also reduces the pressure you experience while handling multiple creditors.

What are the disadvantages of debt consolidation loans?

  • Because debt consolidation loan allows you to pay low monthly installments and interest rates, it involves a longer repayment period. Thus you pay more to become debt free.
  • You have to pledge assets like your car or home in order to obtain a secured debt consolidation loan. If you fail to make the payment on time you might lose your assets.
  • The fact is that the borrower now has another loan (acquired in a lump sum) on his name to pay off. This can adversely affect the borrower's credit report.
  • Debt consolidation loan can only offer short-term relief to a borrower. It does not address the problem of bad spending habits or stop him from taking up additional loans.

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