Debt Consolidation loans: Pay off your debt with a low rate loan

Debt consolidation process helps to merge your multiple bills into a single low interest loan. Debt consolidation loans are available both as unsecured and secured personal loans. Here are some essential facts about debt consolidation loan given below:

Table of contents

When a debt consolidation loan is suitable for you?

Under the following situation debt consolidation loan is suitable for you:

  1. Unmanageable multiple creditors and monthly payments.
  2. Continuous default on monthly payment to the creditors.
  3. Merging various bills into a single monthly convenient payment.
  4. Save money after making the monthly payments.
  5. Fail to deal with the harassing collection calls.

What are the advantages of unsecured debt consolidation loans?

  • Low interest rate: The interest rate on the credit card is comparatively higher than the interest charged on an unsecured loan for debt consolidation. Therefore, consolidating the current bills with a low interest consolidation loan will help to make the monthly payment lower.
  • Combine bills: Debt consolidation loans can help to merge your multiple unsecured bills (credit cards, payday loans, medical bills) into a single monthly affordable payment.
  • Long term loan: Unlike traditional loans, a low interest debt consolidation loan has extended payment plan. A monthly payment on debt consolidation loan is not high because of low interest rate and longer duration of the payment plan.
  • Decrease in the number of collection calls: A debtor can avoid harassing collection calls once he starts paying the existing bills to the creditors with a debt consolidation loan.
  • Credit score re-established: Credit score will be re-established as the current bills are paid off with a debt consolidation loan. Paying off the delinquent accounts will have a positive impact on your credit report.

What are the eligibility criteria for the loan?

There are no specific eligibility criteria for a consolidation loan. The lenders usually make sure that you are capable of repaying the loan along with your other monthly bills. The general factors which are considered includes:

  1. Credit history – Regular defaults and extremely poor credit score may prompt the lender to reject your loan application. A high score with a stable credit history is usually preferred.
  2. Steady income – Without a steady income, the borrower would neither be able to repay back the loan within time nor would be able to continue with the regular payments. Therefore lenders prefer individuals with steady income and usually require the borrower to meet a certain debt-to-income ratio.
  3. Stability – A house owner is considered more stable than someone living in rented spaces. Usually, lenders consider an applicant to be stable if he or she has been living in the same residence for at least the last 2 years at-a-stretch.
  4. Asset ownership – Though it's not mandatory with all lending institutions, lenders prefer applicants with assets. Assets like a home or a car etc. acts like a guarantee for the loan, so that in case you default on the loan, the lender can decide to foreclose or repossess the asset.
  5. Home equity – If you are looking for a Home Equity Loan or a Home Equity Line of Credit, the lenders will evidently make sure that you have considerable equity in the house since it'll be placed as a collateral.

What are the things to check before applying for the loan?

  1. Review credit report: Reviewing credit report helps to analyze financial problems that can be wiped out with a debt consolidation loan.
  2. Outstanding balance: Calculate the outstanding balance to determine the amount that is required to take as a consolidation loan to pay off the owed amount.
  3. Type of debts: The high interest debts (credit cards, payday loans, etc) should be paid off using a low interest debt consolidation loan. The accruing interest on the principal balance of the credit card will make it unaffordable. The low interest debts might not be included in the consolidation as it will be easier to mange.
  4. Check budget plan: Checking the budget helps to estimate the amount that can be paid monthly towards the consolidation loan. Therefore, apply for a consolidation loan according to your financial situation.

How much fee charged on a consolidation loan?

A fee will be charged on taking out a debt consolidation loan. The fee might vary according to the different financial institution that offers the loan. The interest rate on the consolidation loan is comparatively lower than the credit cards. The financial institutions generally charge low interest on the loans.

What are the ways to select the right consolidation loan?

Compare the interest rates offered by different financial institutions before selecting a debt consolidation loan. Find out the pros and cons of debt consolidation company that charges low monthly installment on the loan. Negotiation can help you get better rates with the companies. Try to look for fixed rate loans then the fluctuating market rate will not have any impact on the loan program. It will be beneficial to select a debt consolidation loan if the monthly payment is lower than current bill payment.

Make sure that the loan company you choose is not rigid on the repayment plan. If your financial situation improves then you can make large payments and settle your debt faster.

How debt consolidation loan scam can be avoided?

The precautionary steps before taking out a debt consolidation loan that you need to follow are given below:

  1. Upfront fee: Avoid debt consolidation loan companies that charge upfront fee in the form of "administration fee" or "processing fee" or "application fee". Before applying for a consolidation loan check the legitimacy of the company with the Better Business Bureau.
  2. High service fees: The debt consolidation loan company charging high service fees include in the loan without informing the borrower. Therefore, the borrower ends up paying more after the completion of the scheduled repayment program.
  3. Converting unsecured to secured loan: Avoid a lender who compels you to convert your unsecured debt into secured debt. So do not sign any legal documents without reading it thoroughly.

What are the drawbacks of debt consolidation loan?

The repayment terms on unsecured debt consolidation loan is extended over a longer period. This helps to lower the monthly payment but you end up paying more in total interest over the term of the loan. There will be no tax benefit on a debt consolidation loan.

A debt consolidation loan can help you get back on the right financial track. And once you start paying off your bills your credit report will eventually improve. But if your credit score is low and failed to qualify for debt consolidation loan then hire the services of a debt consolidation company to manage your financial problems.

  • expertise badge
  • TrustLink logoTrustLink logo
  • Customer ratings on BBB
  • IAPDA logo
  • Calchamber Member
  • Calbar Registered
  • D&B
  • Trustpilot
  • yelp logo