Debt Consolidation Loan- Pay Off Your Debt Today

A debt consolidation loan is where a bank, a credit union or a finance company provides you with the money to pay off your outstanding credit card debts and “consolidates” them by bringing all the loans together into one big loan. People usually apply for a consolidation loan when they have trouble paying up even for their minimum monthly payments. There are certain advantages as well as disadvantages for a loan like this, lets have a look at them.

How Does a Debt Consolidation Loan Help to Pay off the Debt

In a debt consolidation loan the lender will credit you the money to pay off your existing debt by lending you the money you need. For example, if you have 4 credit cards and you owe a combined Rs. 1,00,000 on them, when you ask your lender for a consolidation loan, they will lend you the Rs. 1,00,000 provided you qualify. The lenders then pay off your existing credit cards dues, close those credit card accounts, and then you make one monthly payment to your lender for the Rs. 1,00,000 you borrowed.

Keep in mind that If you don’t have a realistic actively used household budget, after a few months of clearing the loan payments, you might be struggling again and re-applying for new credit cards. When this happens, you could be actually doubling your debt, rather than paying it off with a consolidation loan.

Additional Reading: Understanding the basics of debt consolidation

Debt Consolidation Loans are of Two types

1. ‘Secured Loans’ which are backed by assets of the borrower, such as a house or a car, and it works as collateral for the loan.
2. More-traditional, ‘Unsecured Debt Consolidation Loans’, which are not backed by assets, can be more difficult to obtain. They also tend to have higher interest rates which are fixed rates and has lower qualifying amounts. Even so, the interest rates are still typically lower than the rates on credit cards.

Advantages of a Debt Consolidation Loan

The main advantage of taking a debt consolidation loan is that your current debt of all the build up of credit cards dues, the household bills, and even overdrafts on your bank accounts which you were struggling to pay up is cleared. Unsecured debt consolidation loans take the pressure off by paying lots of different bills each month and even those due from the past.

1. You only have one monthly payment to clear off.
2. You can consolidate at a lower interest rate which saves your money.
3. Your debt gets paid off in a definite amount of time which would be around 2 -5 years.
4. There usually aren’t charged any fees when borrowed from a bank or credit union.

Disadvantages of Debt Consolidation Loan

• Lenders are cautious in approving unsecured debt consolidation loans. In order to qualify for such a loan, you would typically need to have solid income, a high net worth which is the value of your assets after you deducted your debts and a very strong credit score or a co-signer with a very high net worth and a strong credit score.
• They often demand a security or collateral.
• One must have a respectable credit rating.
• Interest rates are usually higher in comparison to a home equity loan. If the cause of the problem that caused the debt in the first place is not addressed, you may end up taking another consolidation loan after paying off the first one.

One of the main reasons why a debt consolidation loan won’t work is when people don’t use a realistic household budget. It’s essential to manage routine bill payments, loan payments and annual expenses both the regular and unexpected expenditures more rigidly when you have undertaken a consolidation loan.

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