Is It a Good Idea to Do a Debt Consolidation Loan?

Is It a Good Idea to Do a Debt Consolidation Loan?

Debt consolidation loans can be the ideal element for those who want to get relief from debts and want to improve their chances of getting more credit in the long run. If you were forced to take action with your debts, the possibility of consolidating debts into a single, long-term payment will be very exciting as it will reduce the monthly payment. There are many companies that will be happy to offer such a loan to people who are trying to consolidate their debts and become free of all debts within a short period of time. Such a loan can help you to improve your credit score and can also make you eligible for more credit in the future.

To apply for such a loan, you need to possess some property that can be mortgaged, be able to pay the consolidated amount, have a stable income, and be able to provide a guarantor (if asked by the lender). The amount that you need to pay per month is substantially reduced because you will stop paying interest on each debt and because interest charged with such loans is lower than the interest charged with other loans. With debt consolidation you can pay several debts with the help of one monthly payment. Debt consolidation is just one of the solutions to reduce your debts. 

The desire for material things has made people have major debt problems today. Debts occur mostly due to uncontrolled expenses and when impulsive people start spending beyond their means. It is important to get rid of debts, because if you run into huge debts it can harm your financial history or you might even lose your home and other personal belongings. But every problem has a solution, millions of people have transformed their debts into a learning experience and have been able to pay them off.

What is Debt Consolidation?  

Debt consolidation or debt reunification is a process that allows you to convert all your monthly payments into a single payment less than the sum of all your current monthly payments, hence the term consolidate or unify is used to describe this process, because it groups all your debts into one. In short, what you get with debt consolidation is to convert all your current debts, whether long or short-term, lower long-term debt only, and thus pay less each month. 

Types of Debts that can be Eliminated By Debt Consolidation 

Loans to consolidate debts usually are granted to pay any of the following debts:

  • Credit card debts 
  • Medical debt 
  • Card debts granted by commercial entities 
  • Personal loans 
  • Student loans 
  • Bounced checks 
  • Home loans etc. 

Steps to take before applying for a debt consolidation loan:

Before applying for a loan to reunite all your debts you should perform the following steps: 

  • Calculate the sum of all the money you owe 
  • Think about how much money you want to pay for consolidation. 
  • Find out about the loan conditions set by different lenders as some charge an additional fee if you cancel or repay the loan in advance. 
  • Calculate the difference between your income and your monthly expenses and reserve an amount for emergencies. The resulting amount by subtracting expenses to income is what you can pay a monthly fee for consolidation. 
  • Perform all calculations carefully, because if you cannot afford the fee to consolidate your debts you will be in a worse financial situation. 

Debt Consolidation Loan – Questions to Ask Before Signing the Agreement

Before signing a loan to consolidate your debts you should make sure to have clear idea about the following: 

1. Cost of the Loan – the fees charged should be low so that you can avoid paying a lot of money as fees. 

2. Interest Rate of the Loan – interest charged with the loan usually will be lower than the interest rate of your credit card. If the interest is very high you may no longer be able to make payments for the loan and so you should opt for a bank that offers such loan at a reduced rate of interest. Try to get a fixed interest rate loan so that the monthly payment remains unchanged. 

3. Loan Instalments – The monthly instalment amount must be less than the sum of what you are paying now for separate instalment, in order to pay for all your debts. 

4. Effect on Your Credit History – make sure that you get a fair idea of the impact that the loan will have on your credit history and credit score before you apply for it with the bank.

Benefits of Debt Consolidation Loans  

The debt consolidation loans are useful for people with high interest on their debts and those who face a lot of difficulty in making their monthly instalment payments. The main benefits of consolidating debts and applying for a consolidation loan are listed below. 

  • You can merge all your debts into one – Suppose you have five different debts, a home mortgage, car loan, a personal loan and some balance in two credit cards, you need to be aware of each of these debts and pay 5 receipts each month. With debt consolidation your 5 debts will be consolidated into one, so you will need to pay only one bill each month, which will be easier to plan and you will find it easier to  budget your expenses. 
  • It will reduce the average interest rate on the total amount – With five different debts, the higher interest rate can be as high as 18 percent and the lower rate of interest may be 3.5 percent. After consolidation, the consolidated debt can have an interest rate of only 3.5 percent, so your average rate is significantly reduced and thus your overall debt and instalment payment that you have to make each month. 
  • It will reduce your monthly instalment payments – The debt consolidation loans can reduce the total amount of money that has to be paid monthly, that is, after the consolidation of debts, you will have to pay less money as a single monthly payment compared to the total amount of money that you would otherwise need to pay for separate instalments. 
  • You will be able to become debt-free within a short period of time – When you consolidate your debts, you will be able to get a clear picture of the amount that you owe. Hence, you will be better equipped to play your payments and then also plan your budget in such a manner that you can pay more amounts each month. Therefore, you will be able to become debt-free within a short period of time.  
  • It will improve your credit score – When you apply for such a loan, your credit history and as a result your credit score will also improve. The lenders will be aware that you are making an attempt to be debt-free and are no longer a defaulter. Besides, the regular payments that you make will be reflected in your credit history and so your credit score will improve in the process. 

Documents Required to Apply for Debt Consolidation Loans

  • A copy of your monthly expenses has to be presented to the bank so that they can verify if you can pay the unified monthly amount. 
  • You must have stable monthly income to repay the loan
  • You may need a co-signer (a person who will sign the agreement with you and will be responsible for your payments if you do not make them on time) or a material guarantee, like a house or a car.