Debt Consolidation Loan

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Consolidation loan option

What is a Debt Consolidation Loan  - Definition. A Debt Consolidation Loan is a specific named loan taken to consolidate higher interest rate debt.

Features: A debt consolidation loan is relevant for both unsecured and secured debt rationalization. Through a debt consolidation loan you gain immediate creditor payoff by means of a new loan. Debt consolidation "transfers the debt" to one new lender. You still have the debt, but now in the form of a single loan. Debt consolidation combines the balances owed into one creditor account.

A debt consolidation loan is one of the three core options for dealing with Debt and Consolidation:
  - Loan - Plan/Program - Settlement

loan debt consolidation

Strictly speaking, a personal debt consolidation loan is the only method that achieves personal debt consolidation. Loan options bring debt into one account and thereby reduce the number of creditors. Plan/Program and Settlement options do not involve a loan, and do not consolidate debt. Non debt consolidation loan options involve consolidation of your repayments only (each debt and legal liability to the creditor remain). Furthermore, non debt consolidation loan options can deal only with unsecured debt.

Types

A debt consolidation loan may be distinguished for other loan types often used to achieve the same purpose.

1. Debt Consolidation Loan (a named product often seen advertised from company lenders online)

2. Multiple Other Types of Loan/Lending (that can be used for the same purpose)

Here we discuss the specific debt consolidation loan product. Later we examine the widest set of "debt consolidation loan" alternatives and lenders that may be available.

How It Works

In many cases, the company offering a debt consolidation loan product actually liaises with the creditors that you identify in the application process. They arrange to pay your creditors off at the time that they originate the new loan. Debt consolidation loan providers may therefore afford some administrative help in the process.

In other cases you may simply be issued the funds, and need to take action yourself to pay off the creditor debt that you have decided to consolidate into the new loan. Debt consolidation loan types may be either secured (against collateral, e.g. your house/car/other) or unsecured (based on your creditworthiness). These options depend on the loan provider and your circumstance. In general, a personal debt consolidation loan that is unsecured is more expensive than a secured one. At the end of your personal debt consolidation loan term, if you have made your payments and not accumulated new debt, then you would become debt free.

When To Consider

  • You have high interest rate debt
  • You are committed/aim to pay off the debt in under 5 years (benchmark).
  • You have income stability and could afford the repayments
  • You are not having serious repayment difficulties, perhaps heading towards bankruptcy alternative.
  • You have considered all the alternatives to a debt consolidation loan product (this website explains).

Why 

Combining your debt into a new loan does not immediately reduce the debt but if properly sought, should lead to an immediate reduction in monthly payments. A debt consolidation loan should have a lower APR interest rate than the rate applicable to each debt to be consolidated. It will not improve your credit score immediately.

Qualify

Debt-to-income ratio and credit score affects your ability to qualify for/terms of a loan. Debt consolidation loan customers with bad or poor credit have less choice over providers, secured/unsecured choice and suitable interest rate.

Cost

Monthly repayment (cost of borrowing APR) on the loan. Debt consolidation loan providers may also charge a front-end application/processing fee and/or a back-end early repayment penalty.

Duration

A debt consolidation loan may range from 6 months through many years, depending on the lender. Some debt consolidation lenders may offer a maximum 5 year term.

Who - Debt Consolidation Lenders

Banks (Debt consolidation lending in the form of a specific debt consolidation bank loan)
Credit Unions
Finance Companies
Debt Consolidation Loan Companies
Social Lending/ Peer to Peer debt consolidation lenders

Pros

The rationale for taking a personal debt consolidation loan

  • Lower interest rate than previous rates. Stops you wasting money on excessive interest.
  • Lower monthly outgoings after consolidating with a personal debt consolidation loan compared to the total of your previous repayments (cut down living cost).
  • Pay off your total debt faster - IF you put the monies saved through lower interest back towards increased repayments.
  • A single debt consolidation loan company repayment is easier to manage
  • Can help you manage and reduce debt as part of an action plan/concerted effort
  • Can lock in a fixed interest rate benefit
  • Can include most debt that you may want to deal with (secured and unsecured debt)
  • Sets a timeline for debt clearance (the loan duration)

 

Cons

  • May lose aggregate repayment flexibility that comes with having various accounts
  • A loan for debt consolidation may extend the repayment period or life of the debt
  • Can mean an absolute increase in the total amount repaid over the life of the debt, compared to the previous situation (cost more in the long run).
  • Acquiring a loan for debt consolidation may necessitate the conversion of unsecured into secured debt.
  • A debt consolidation loan may be difficult to qualify for with poor credit and or a high debt-to-income ratio.
  • May not qualify for a decent interest rate so making the transaction worthwhile.
  • May not be able to access sufficient funds to pay off the original debt grand total desired.
  • Cost involved in set up (should be factored into your decision)

 

Pitfalls

  • Not researching into potential provider choice
  • Not comparing different products and debt consolidation loan rates and terms
  • Not calculating potential savings (cost benefit)
  • Navigating predatory lenders offering poor debt consolidation loan rates and terms
  • Taking on more/new debt (especially in the case of having consolidated open credit line debt, like credit cards).
  • Ending up paying more due to a lack of research/poor calculation
  • Including too much, or including debt amounts with no interest rate gain.
  • Rushing into a decision. "Haste makes waste"
  • Failing to remember that you may be able to negotiate down the original creditor interest rates.
  • If your home is used as collateral, you put your home (collateral) at risk if you default.
  • Failing to explore/investigate debt consolidation loan alternatives
  • Assuming that a better deal through a debt consolidation loan online is a given
  • Not being aware of the existence of some unscrupulous debt consolidation loan online providers
  • Requires an end/stop to all previous lines of credit use in order to be a successful strategy.
  • Not a solution to poor budgeting and over spending. Strategic success often requires improving fiscal responsibility.

 

Watch Out For Bad

  • Misrepresentation of the terms of a debt consolidation loan. Debt consolidation may require signing your home as collateral or it may not. Watch for operators not clearly explaining fees or hiding the fact that you are actually signing your home as collateral when you thought otherwise.
  • Lenders who for an advance fee will guarantee your debt consolidation loan. Debt consolidation loan qualification requires an assessment. An appraisal/application fee is necessary in many cases, however legitimate lenders cannot guarantee that you will be granted the loan.
  • Telemarketing approaches? Potentially enough risk here that the safest thing to do is discard any company that pursues you in this manner.

Debt Consolidation Loan Fast Application 

You'll need to gather information for a lender assessment. Lenders should consider your income/expenditure and existing total debt load.

- Monthly Income
- Housing Cost (rent or mortgage plus property tax and hazard insurance)
- Routine Services Bill Amounts (e.g. utilities)

Now list the applicable balance owed, interest rate, minimum payment for ALL non housing debt that you currently have

- Current Loan (e.g. auto)
- Credit Card Balances
- Store/Purchase Financing
- Other monies borrowed

Next confirm the loan consolidation debt plus contact information for those creditors.

Consider

  • Compare debt consolidation loan rate and products from several providers
  • Secured/unsecured
  • Interest rate APR (should be less than debt to be consolidated)
  • Set up fees / Early repayment penalty?
  • Loan duration
  • Fixed rate for the duration? /Any variable debt consolidation rate?/Any introductory rate that will end?
  • Hidden small print fees: Allowed to make increased repayments? Penalty for late payment? etc.
  • Calculate the expected monthly debt consolidation loan repayment. Can you afford it?
  • Consider the implications of turning unsecured into secured debt
  • Get debt consolidation loan advice from an independent professional if you can

A debt consolidation loan can be an excellent solution to managing debt, IF you choose a loan carefully, put an end to further borrowing and take control of your budget. Next consider alternative sources of Debt Consolidation Loans











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