Consolidation Loan

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Best consolidation loan

The rationale behind a consolidation loan is simple. With a consolidation loan you combine higher interest rate debt into a new lower interest rate debt in order to save money. Your new consolidation loan is easier to manage, with just one payment to make instead of multiple. For many people, consolidating their debt by means of a loan is both viable and a solid financial choice on the road to debt freedom.

The consolidation loan approach is not however universally applicable or successful, and requires careful choice, along with a clear understanding of some implications and issues.

best consolidation loan

We examine the loan alternatives for achieving consolidation of consumer debt in our article Consolidation Loans

Here we consider the consolidation loan product offered by various lenders.

A consolidation loan does not reduce the amount of debt, that is, you still have all of the original balance owed. The purpose of a consolidation loan is to improve the "cost of debt", that is, the amount of money that you pay to use someone else's money. The rate of interest is the cost of debt, otherwise known as the cost of borrowing. Through a consolidation loan you reduce the cost burden of debt. 

Consolidation Loan

Should I take out a consolidation loan? The answer is not a simple yes or no.

A consolidation loan may cut the cost of your monthly debt payments and free up money. This is the premise upon which a consolidation loan is marketed to you. Lenders are quick to talk about your new lower monthly payment, but not so quick to go into detail about the possible implications of taking out a consolidation loan.

A consolidation loan may increase the total cost of your debt. Despite what can often be a greatly reduced monthly payment, you can often end up paying even more to clear your debt than you would have otherwise, before the consolidation loan. How?

If your new consolidation loan is spread over an extended duration, then by the time you have paid off the loan you may have paid a lot of money in Interest Payments - even though the Interest Rate was lower than before.

A loan is a financial obligation and an extended loan duration locks you into a longer commitment. Consider, is the new payment sustainable for the length of your new personal consolidation loan.

A personal consolidation loan may or may not be secured against an asset. An unsecured consolidation loan is available without the need to provide collateral. With the unsecured consolidation loan there is no risk of losing your home, auto or other asset required. Qualification for an unsecured consolidation loan is based on credit worthiness and the product normally comes with a higher interest rate than a secured consolidation loan in order to offset the risk.

Be conscious of application and set up fees that effectively increase the cost of the consolidation loan. Make sure to note whether any such fees are included in the APR quote. What fees are involved with application and origination? Is the interest rate fixed for the entire duration of the consolidation loan or is there some variable part or initial promotional rate? Any late or missed payment fee?

Be mindful of the implications of rolling application/closing costs into a consolidation loan. Ideally there should be no prepayment penalties with a new consolidation loan. If you choose a consolidation loan with a lower monthly payment you should retain the ability to make larger repayments against the loan principal in order to pay off the debt faster. You also need to factor in any early repayment penalty applicable on the existing debt.

Consolidation Loan Providers

- Banks
- Credit Unions
- Finance Companies
- Debt Industry Lenders
- Social Peer To Peer Lenders

The lender choice depends on:

- Amount of debt
- Credit score / report
- Collateral availability

Banks and Credit Unions

May offer secured and unsecured consolidation loan options although in general, reasonably good creditworthiness is required in order to qualify, even in the case of secured bank consolidation loan rates. Qualification means being granted bank consolidation loan rates that are conducive and that make the consolidation exercise worthwhile.

Finance Companies and Debt Industry Lenders

Finance companies and debt industry lenders cater to a wider range of credit profiles from good through bad. These lenders may offer a bad credit consolidation loan for those unable to qualify elsewhere. A bad credit consolidation loan may be still be limited by the amount of debt and availability of collateral.

Compare any consolidation loan for bad credit product with choices available from a few lenders. A consolidation loan for bad credit from many providers will typically come with a higher rate of interest and fees attached. Furthermore, in order to sell consolidation loan bad credit products through attractive monthly payments, the length of such loans may extend beyond several years, increasing the total cost of the debt in the long run.

Peer To Peer Lenders

You may be able to secure better consolidation loan rates or more favorable terms here.

For a payday consolidation loan the same provider choices may apply. A payday consolidation loan could take the form of a short term (e.g. 90 day) loan. Even with bad credit, the terms are likely preferable.

Best Consolidation Loan

Carefully choosing the best consolidation loan companies is an essential step in the consolidation loan process. The best consolidation loan companies do not exhibit predatory lending practices. Some debt industry lenders may attempt to exploit you through abusive terms and excessive fees. Comparing the terms of several consolidation loan products is essential. Do not assume that all consolidation loan products from any class of lender are the same. Even well established banks and credit unions can be seen to use aggressive tactics to draw you into what may be a poor product. Be cautious when you see instant online approvals and apply now! buttons with little no other information offered. The consolidation loan market is competitive but as in all multi-product markets, some companies simply do not offer a cheap consolidation loan. How to get a consolidation loan that works. Perhaps the biggest issue is the need for a wider action plan often necessitating a budget overhaul. Since a loan is a tool to manage the debt cost burden it deals with the effects of debt but does not address the cause.

If your debt was essentially caused by overspending a loan cannot solve this problem. One issue with a consolidation loan is the tendency of some consumers to feel that the new loan has solved their financial problems and they go on to increase debt further by spending more. It is dangerous to borrow more than you need to pay off the original debt. Consolidation loan savings should be plowed back into larger debt repayments in order to pay off debt fastest.

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