A lot of people have used debt consolidation loan to solve their credit issues. However, not everyone was successful at it. While it can be a legal and effective way to get out of debt, it is not always the right solution for everyone. There is no one formula to get out of debt. This is why you need to study your options carefully so you can make the right choice.
There are several debt relief options to choose from. Debt consolidation loan is only one of the options that you have. You need to conduct thorough research about each option so you will know which one is the perfect solution for your debt and financial situation. If you choose correctly, you will find that getting out of debt will become easier. But if you choose the wrong option, it will be more difficult to complete the program. It will either be too long or the payments will be too expensive for your budget. When that happens, you might end up having a really hard time completing your debt payments.
This is why it is very important for you to determine if debt consolidation loan is a good idea or a bad one. While it seems like the best way for you to get out of debt, you need to be certain that your finances and unique debt situation are the right fit for it.
What are the common reasons to use debt consolidation loan?
Before you determine if this is a good or bad idea, let us try to understand why debt consolidation is needed in the first place. There are three basic reasons why you want to use debt consolidation loan.
To combine multiple debts. As the name suggests, this type of debt solution will help you combine multiple debts. You will borrow a loan that is big enough to completely pay off your multiple debts. Once the lender approves, they will arrange to pay your original debts. After that, you will be left with one big loan. It makes the repayment easier because you will now be left with just one debt to pay off each month. Monitoring the payment will not be as confusing and difficult to track.
To lower the interest rate. Another reason to consolidate debt is to lower the interest rate. This is the reason why this is a great debt solution for multiple credit card debt. The interest rate of credit cards is notoriously high. The bulk of your monthly payments will go to the interest alone. If you get the chance to lower that interest rate, you can save money because a bigger portion of your payment will go to the principal balance. If you have a variable rate and the market show signs that it will increase the rates, you can grab the chance to switch to a fixed rate.
To improve payment terms. The third reason to borrow a debt consolidation loan is to help improve the current payment terms that you have. Some lenders impose high fees and other charges. If you want to switch to a different lender who does not charge multiple fees, you might be better off with that new lender. Another improvement that you can opt for is the repayment period. If you want to save money by paying less interest, you may want to shorten your payment period. The shorter term means you have to pay a bigger amount each month but that would lessen the interest that will accrue on the loan. But if you want to lower your monthly payment, you can go for a loan that allows you to stretch your repayment period. This will distribute your balance over a longer term to achieve the lower monthly payment that will give you more room in the budget.
When is debt consolidation loan a good idea?
As mentioned, debt consolidation loan will help you get out of debt – but only if you have the right credit and financial situation. Here are the signs that will tell you if this is the right debt solution for you.
If you have a good credit score. This is a loan after all. You need to prove to the lender that you can pay off that amount that you will borrow. It is not enough to show evidence that you are earning a high income. You also need to prove that you can be trusted to pay off the loan. The best way to do this is by having a high credit score. A high score means you pay your dues on time, you have a healthy credit utilization and you basically know how to use debt properly and responsibly. A good credit score will make you a low-risk borrower. That means the lender will not give you a high-interest rate on the loan.
If you have a stable source of income. Another sign that debt consolidation loan is a good idea is when you have a stable source of income. You have to remember that this debt solution only transferred your balance under one lender. You still have to pay it off. This means you need to prove to the lender that you can pay it completely. A debt consolidation loan usually takes 3-5 years to pay off. Your income should be stable enough to last long enough for you to reach the end of your loan terms.
If you have a repayment plan in place. Some people think about the repayment plan after the loan is approved. The best way to borrow money is to make sure you know how you will pay it off. Do not decide on the payment method when the loan is already there. You might realize that you cannot afford to pay it off after all.
If you know the habits that will get you out of debt. Finally, debt consolidation loan is a good idea if you have identified the habits that will help you get out of debt. Sometimes, people focus too much on paying off the debt. That only solves half of your credit troubles. You need to change the habits that got you in debt in the first place. For instance, overspending is one reason to be in debt. Not having an emergency fund is another reason to end up in debt. Once you have identified the cause of your debt, you can find a way to solve it so you can really eliminate your debts.
In case you find all of this confusing, you can talk to a debt expert so they can answer your questions. Find out more details with #1 debt consolidation Company – nationaldebtrelief.com.
When is debt consolidation loan a bad idea?
There are also certain signs that will tell you that debt consolidation loan is a bad idea.
If you will use it as the only debt solution. As mentioned, debt consolidation loan will only solve half of your problem. It only makes your repayment more simple and easier to complete. But it will not put a stop to the cause of debt. Consolidating the debt does not mean it is already paid off. You still have to go through the payment process. You need to know what you will do to pay off the debt. That means coming up with another debt solution to completely pay off all your credit obligations.
If you cannot control your spending habits. One of the dangers of debt consolidation loan is you will have a false sense of debt freedom. You think that you already paid off your original loans. That could lead you to think that you can already use credit. If you cannot control your spending habits, it will be easy to give in to the temptation to use debt once more.
If you will end up with a higher interest rate. It does not make sense to borrow a loan that will give you a higher interest rate. Why would you want to spend more on the loan? It is better to keep your debts as it is. Sometimes, you end up with a higher interest rate because of a poor credit history. You can always postpone consolidating your loans so you can work on your credit score. Once it is high again, you can apply for another debt consolidation loan and hopefully, your improved score will help you get better rates.
If you want to have space in your budget to spend more. Finally, it is a bad idea to consolidate debt with a loan if you are only doing it so you will have more room in your budget to spend more. Some people have credit card debts and choose to consolidate them under a loan so they can use their cards on other expenses. If this is your reason to consolidate, then forget it. You will only make your debt situation worse.
It is important to read through researched debt consolidation reviews so you will get a feel of how this debt solution really works. It will help you get the opinion and actual experience of consumers who used a debt consolidation loan to get out of their credit troubles.
What are the best debts to combine under a debt consolidation loan?
The truth is, you can use debt consolidation loan for combine all types of debt. However, there are debts that are best suited for this debt solution. Here are the three best debts to consolidate through a loan.
Credit cards. These cards are notorious for having really high-interest rates. This is why most people want to convert this debt into a loan – which has a lower rate. Instead of struggling to pay only the minimum, consolidating multiple credit cards into a loan with a lower rate seems like the best way to save money. The money that is being spent on the high-interest amount can already be used to pay off the principal balance.
Personal loan. Another debt that you can consolidate is a personal loan. This is an unsecured loan that you can use on just about anything. If you have a good credit score or if the interest rate in the market is currently low, then you can opt to consolidate this debt so you can take advantage of a lower rate. As long as this debt does not have a prepayment penalty, it can be part of your debt list for consolidation.
Medical bills. Finally, you can also consolidate any medical debt that you have incurred. There is really no other benefit than having an easier time paying off your health care costs. The thing is, you have just gone through a major emergency. You want to focus on getting better instead of stressing over your debts. By simplifying the repayment process, you will not feel too stressed about meeting your payments each month.
While you can consolidate your home loan with other debts, it is not always advised. You will be converting your unsecured loans into a secured loan. While this will result in a lower interest rate for the debt, you will be putting your home on the line. Sometimes, if you are consolidating for the wrong reasons, it might not be worth it. You could end up losing your home in the process.
What are the reasons for you to be declined of a debt consolidation loan?
In case your debt consolidation loan application is declined, you should not ignore it. That could be a sign of a financial problem that landed you into debt. It deserves to be investigated so you can figure out how to improve your financial position as a whole.
Here are possible reasons why your loan application was declined by the lender.
You are not earning enough. The lender needs to be shown proof that you can afford to pay off the loan. If not, then you need to look for a debt solution elsewhere. In fact, you might be better off with a debt reduction or debt settlement. A debt consolidation loan might take some time to completely pay off so you have to make sure you have a stable income to support it.
You cannot provide a collateral. Another reason for your loan to be denied is when you cannot provide a collateral. This is usually for secured loans. There are times when the lender will require this from you if you have a bad credit score. They would prefer to give you a secured loan so they have something to liquidate in case you fail to pay back your loan.
You have too much debt. Lenders will also disapprove your application if you have too much debt. You cannot borrow more than what they feel you are capable of paying off. It is either you prove to them that you have a higher income or you pay off a portion of your debt before taking on a new loan.
You have a bad credit score. Finally, a good reason to be declined of your debt consolidation loan is when you have a bad credit score. A low score means you failed to practice good payment habits. That makes you a high-risk borrower. The chances of you not paying the debt is more likely to happen. Lenders will not go into business with the likes of you.
What are the two alternatives to consolidate debt?
In case you think that debt consolidation loan is a bad idea, do not worry because there are still option to consolidate your debt without getting a new loan. In fact, there are two options for you.
This option involves the help of a credit counselor. You will meet with this counselor to discuss your specific debt and financial situation. Together, you will create a DMP or Debt Management Plan that contains your repayment plan. This plan will be created to perfectly suit your financial situation. If you need a lower monthly payment, your balance will be stretched over a longer payment period. After creating the DMP, the credit counselor will present it to the different lenders and creditors that you owe money to. If they approve, you will be notified by the credit counselor. You will them send the total monthly amount to the counselor and they will be in charge of disbursing that amount towards the lenders and creditors in your list. This will make things simpler for you and it will not involve getting a new loan. You only have to pay a small amount to the credit counselor – around $50 a month. There is also a one-time enrollment fee that is around $75.
The other option to consolidate debt without borrowing money is debt settlement. If it is debt reduction that you need, then this is the option that you want to use. This involves negotiating with your creditors and lenders so they will allow you to pay only a portion of what you owe. Once the settlement amount is paid, the rest of your balance will be forgiven. This process can be done with a professional but it is also something that you can accomplish yourself. But if you feel like you cannot negotiate with your creditors and lenders properly, you may want to hire a professional to help you out.
It is important for you to think through the decision of using debt consolidation loans. Remember that there is a specific option that is best suited for your debt and financial situation. Be very careful in making your decision. Make sure that your choice will be a debt solution that you can complete.