You might find yourself juggling multiple loans at any point in your life. It might cause you financial and mental strain. Thus, to simplify the repayment process, you may apply for a debt consolidation loan.
In layperson’s terms, a consolidation loan allows you to borrow from a lender to pay off your old debts. The services of debt consolidation involve combining all your debt into a single new loan with repayment terms more favourable than the previous loans.
You can pay off this new loan over a period ranging from 12 to 60 months. Consolidation loans allow you to make single monthly payments while lowering interest rates and reducing monthly bills.
Let’s first understand how debt consolidation works.
What is Debt Consolidation?
When burdened with multiple debts or the consolidated debt amount you have to repay goes above $10,000, you can apply to consolidate your debt into a single liability and pay them over time.
You can apply for debt consolidation from financial institutions like banks and credit card companies. You can also approach private debt consolidation service providers or mortgage companies if you are refused.
Creditors such as private companies that specialize in providing the service are invested in offering debt consolidation services as it increases the likelihood of repayments from the borrowers.
However, while applying to consolidate debt, you must remember that it does not erase the original indebtedness or offer any actual debt relief. It merely transfers your loans to a third-party lender.
Types of Debt Consolidation Loans
Like any other loan, there are two broad types of debt consolidation loans- secured and unsecured. Secured loans are offered to you against collateral, like your personal assets- house or car. The rate of interest on such loans is lower than the insecure ones.
Unsecured loans are a bit difficult to obtain, and they may have particular limitations on the borrowing amount as there is no collateral involved. However, unsecured loans offer a lower interest rate than credit card charges.
Apart from the broad divisions of consolidation loans, there are several ways to consolidate your debts in a lump.
Methods to secure Debt Consolidation Loans
1. Credit Cards
You can transfer all your credit card payments into a single new card. It is a good idea only if the new credit card that you apply for does not incur extra interest or the interest amount is minuscule. Otherwise, you can also transfer the balance of one card to another that needs repayment.
2. Student Loan Programs
Various options allow someone with student debt to consolidate loans through multiple services.
Home Equity Line of Credit Loans, or HELOCs for short, allows you as the account holder to use a pre-set amount of cash which can be repaid over due course. It has a much lower rate than what credit cards charge on the outstanding balance.
4. Debt Consolidation Loans
Various money lenders offer consolidation loans as a method of repayment when you are troubled with repaying multiple loans. The service is incredibly lucrative for anyone who wishes to pay down several loans with high-interest rates.
Do Debt Consolidation Loans Impact Your Credit Score?
Well, you may find a momentary dip in your credit score as you apply for a single new loan that will potentially close off all your previous loans. However, as you may make regular repayments on your new debt and miss no payments, you can see your credit score rising with time.
The most significant advantage of debt consolidation loan is that it allows you to work off your debt in a single monthly payment rather than fumbling through multiple charges. It does not dent your credit score, and regular repayments will enable you to be debt-free after a while.