Debt consolidation loan is an effective way to get out of debt. However, it is only a good idea to use it if you have the right debt and financial situation. Before you choose any of the debt relief options available, you have to understand your financial position first. Without this understanding, you could end up choosing a debt solution that you cannot afford or commit to. Or you can end up wasting money because there could have been a better solution that could have saved you more.
If you wish to understand your options better, you should call number #1 debt consolidation company, National Debt Relief. There are several debt experts on standby who can explain to you the best option for you to get out of debt. These initial consultations are free and with no obligations – you will only be educated about your options. From there, you can make a smart decision about how you will get rid of your debts.
What are the three reasons why debt consolidation loan is a good idea?
If your heart is set on using debt consolidation loan as your way out of debt, you have to understand the factors that will make it a good idea. You need to take a look at these three factors and make sure they apply to your specific debt and financial situation.
Debt consolidation loan is a good idea…
…if you want to lower high-interest rate debts.
In case lowering the interest rate is not possible, then it does not make sense to consolidate. Why spend more than what you are already paying for the combination of your debts? Even if it will simplify your payment terms, if you will end up paying a higher interest rate, you should stop and reconsider first. Always opt for the lowest interest rate. The thing is, it is possible for you to get a low-interest rate as long as you have a good credit score. In case you do not have a good score, you need to improve your credit behavior to bring your score higher.
…if you are tired of juggling multiple credit accounts.
It is also a good idea to use debt consolidation loan if you want to simplify your monthly payments. When you get one loan to pay off your debts, it becomes easier to meet your payments. You do not have to worry about keeping track of so many due dates and debt amounts. You only have to track one debt and that should make it easier for you to avoid late payments.
…if you need to improve your repayment terms.
Finally, if there is something in your repayment terms that you want to improve, this is probably the best way to do it. You can look for a loan that has the best terms like a shorter or longer repayment plan. You can also look into the fees and charges that your original lenders have imposed on you. In case you find another lender with better terms and who can help you pay off all the debts that you owe and consolidate with them, then go ahead and consolidate.
As much as possible, these three should be applicable to your debt and financial situation to make this debt solution a good idea.
What do you need to make debt consolidation loans work?
Even if debt consolidation loan seems like a good idea, you have to make sure you have the right qualities that will make it work perfectly in getting you out of debt. Here are three important must-haves if you have this debt solution to be effective.
High credit score. This is a loan after all. You want to get the lowest interest rate that you can and the best terms. To do that, you have to prove to the lender that you are a low-risk borrower. This is only possible if you have a good credit score. Having a high score means you pay your dues on time and you do not borrow too much.
Stable source of income. To get approval for the loan, you also have to show proof that you have a stable and steady source of income. After all, they need to know that you are capable of paying back the loan. If you cannot show that proof, it will not matter if you have a high credit score. They will not approve of your loan.
Self-discipline. Finally, it is very important for you to have self-discipline. Remember that a debt consolidation loan will not solve all your debt problems. It will only make it easier for you to pay it back. You still owe the same amount of money – if not more because of the fees that you have to pay for the loan approval. This is why you have to discipline yourself to pay off your loan properly. Set up a repayment plan and make sure it is aligned with your monthly budget so you will always have the funds to pay back your loan.
If you have all three of these, then debt consolidation loan is a good idea.
What are your debt consolidation loan options?
Once you have proven that debt consolidation loan is the right solution to your problems, the next step would be to figure out the type that you will borrow. There are three types of loans that you can borrow to help you consolidate your multiple debts.
Debt consolidation loan. This is an unsecured loan that you can use to combine different debts. It is exclusively used to pay off multiple debts. Sometimes, the fund will not even pass through you. The lender will be the one to process the consolidation. They will require you to submit the details of all your debts so they can help consolidate all that you owe. Once the loan is approved, they will get in touch with your original lenders so they can use the loan to pay off the debts. Until you receive a written confirmation from the lender that your original loans are paid off, you should continue with your monthly payments. That way, you will not miss out on a payment. This is a great option if you have a high credit score. You can get the loan with a low-interest rate – which will help you save in the long run.
Personal loan. This option involves another unsecured loan. However, unlike the debt consolidation loan, this is not inclusive. You can use it on other things. For instance, if you qualify to borrow $30,000 and your debts are only $25,000, you are free to choose how you use the excess $5,000. Not only that, you will be responsible for paying off your multiple debts. The lender will release the full loan amount to you. It is up to you how you will pay off your other debts. If you suddenly decide to use it on something else, nobody will stop you. This is why you have to be disciplined when you get the money. Use it only as intended and borrow only what you need. To increase the benefits of this loan, you should have a high credit score. This will allow you to enjoy a low-interest rate.
Home equity loan. The last debt consolidation loan option is a secured loan. If you own your house and you have a substantial amount of your equity, you can use that to help consolidate your loans. Since this is a secured loan, it will be given with a low-interest rate. The collateral, which is your house, will make you a low-risk borrower. Of course, you could lose your house if you do not pay back the loan. So make sure you have a repayment plan in place so you will not endanger your home in any way.
How to choose between the three debt consolidation loan options
All the debt consolidation loan options are effective and can get you out of debt. However, there are options that are better than the rest. If you really want to benefit from this debt relief program, you have to make sure that your debt and financial situation will suit the type of loan that you will borrow.
For debt consolidation loan
If you have a high credit score and you lack self-discipline, this is the right option for you. The high credit score is necessary if you want to have a low-interest rate. When it comes to your lack of self-discipline, we previously mentioned that the lender will take charge of the consolidation process. The funds may not even pass through your hands. That means it will really go to your multiple debts. There is no danger in having the funds spent on something else.
For personal loan
If you have a high credit score and you are disciplined enough to use the loan as intended, then this is the right option for you. Since this is also an unsecured loan, the high credit score will help you get a low-interest rate on the loan. However, you need to be disciplined with your money because you will be in charge of paying off your multiple debts. You have to make sure that you will follow through as planned. Otherwise, you might end up with more debt than when you started. If you know that you cannot control your spending urges, then it might be best to get a debt consolidation loan.
For home equity loan
If you have a home, a low credit score and you are disciplined to use the loan as intended, then this is the right option to consolidate debt. This secured loan will give you the lowest interest rate compared to the other options. Of course, you have to make sure you can pay off this loan because you use it on something else, you will only bloat your debt balance even further. If you fail to pay this back, you could lose our home in the process.
Admittedly, it can be confusing to choose among these options. You may want to check out debt consolidation reviews so you can read about the experience of actual borrowers. By knowing what others have gone through, it might help you make a decision.
What are the rules that will make debt consolidation loan effective?
After choosing the type of loan that you will borrow to consolidate your debts, you have to understand that the battle is far from over. Debt consolidation will not really solve your problem. It will only make it easier to pay off your loan. However, the journey towards paying off your debt is far from over. To ensure that you can avoid the common pitfalls of debt consolidation loans, here are the rules that you need to follow.
Borrow only what you need. Always remember to borrow only what you need. This is especially true if you are borrowing a personal loan or a home equity loan. You might be tempted to spend the extra money on unnecessary expenses. You have to be wise when it comes to deciding how you will use the loan. Unless it will help you earn more or it involves a life or death situation, you should only borrow what you need to pay off your debts.
Understand the terms of the new loan. It is also important to know the terms of the loan that you are borrowing. Make sure you know the charges and penalties that might be imposed on you. This knowledge will help you avoid them and keep you from unnecessary expenses.
Commit to a repayment plan. Before you borrow the debt consolidation loan, it is advisable to have a repayment plan in place. If you do not know how you will pay for the loan, then do not borrow it. And when you have this plan, make sure that you will stick to it to avoid encountering problems in the future.
Stop using more credit. While you are paying off the debt consolidation loan, it is important to stop using credit temporarily. Sometimes, paying off your credit card balance with the loan will make you feel like you owe less money. That will tempt you to use your cards once more. When that happens, you will end up with more debt. So keep a lid on your spending and try to live frugally until you have paid off a significant portion of your debts.
When is debt consolidation loan a bad idea?
You have to realize that debt consolidation loan can be a bad idea if it does not suit your debt and financial positions. Here are two situations that make this debt solution a bad idea.
If you need a debt expert to help you out. Debt consolidation loan does not involve a debt expert. You will be taking charge of the payments. You have to discipline yourself to ensure that the loan will be used to pay off the multiple original debts. It is also important to make sure that you can commit to paying off your loan and not add more debt to it. If you think that you do not have the self-control to pull this off, you can opt for debt management instead. This option involves a credit counselor who can help you analyze your debt and financial situation. Through the information that you will get, you can create a Debt Management Plan that contains your repayment proposal. The credit counselor will help present this DMP to your creditors and lenders for approval. Once they approve, you will send a single monthly payment to the credit counselor. They will take charge of disbursing the fund to the different creditors. While you are going through the payment process, your credit accounts will be frozen. That means you will be forced to stop using credit until after you finish with the DMP.
If you cannot afford to pay off your balance in full. There are people who try to convince themselves that they can pay off their debts as long as they are given a lower monthly payment. While this is something that debt consolidation loan can do, it may not always be the best move. A lower monthly payment means you will stretch your balance over a longer payment period. Even with a lower interest rate, you will end up paying a lot more on the loan. If you want a lower monthly payment, you should probably think about debt settlement. This might be a better option because it will make debt reduction possible. Debt settlement involves a negotiation process. You will basically try to convince your lenders and creditors that it is in their best interest to let you pay only a portion of the debt and have the rest forgiven. In most cases, they will agree if you have a settlement fund (lump sum payment) to offer or you are on the brink of bankruptcy.
Think about these two scenarios before you set your eyes on using a debt consolidation loan to get out of your tough credit situation.