Debt consolidation loan is a type of unsecured loan that you will specifically borrow so you can combine your multiple credit accounts. It does not matter if you have mostly credit card debts, personal loans, medical bills or a combination of different types of debt. This type of loan can help restructure your overall debt payments so you are left with only one monthly contribution.
The goal of applying for this type of loan is to improve something about your debt payments. The idea is to simplify it so you will not have a hard time meeting all your financial obligations. It is meant to make debt payments easier so it will not take too much of your time or effort to make sure it is funded. That way, you can allocate your time and energy to accomplish other things – like growing your income so you can pay more towards your debts.
While it is an effective way to get yourself out of debt, there is one important question that you need to answer.
Is debt consolidation loan the answer to your debt problem?
There are a couple of things that we need to tackle before we can determine if this is really the answer to your credit issues.
Will debt consolidation loan pay off your debts?
Let us start with this question – will debt consolidation loan pay off your debts?
The answer to that is yes and no.
The debt consolidation loan will pay off the balance of your original debts. Your multiple debts – the ones that you intend to consolidate will be paid off. However, the fund that will be used to pay it off will be the reason why the answer to the question is also a no.
You will use a loan to pay off the original debts. That means you will still owe money. It is like digging a new hole to fill up another one. After the debt consolidation loan, you will still owe the same amount of money. It is a loan after all. As long as you have a loan, you still have a lot of debt to pay off.
What debt consolidation loan does is to restructure your balance so it all goes to one lender and one account. The key to making this beneficial will depend on the loan that you will use to consolidate. If you can get a loan that offers a lower interest rate or a more flexible payment terms, then that would make your debt situation a lot easier. If you know how to use these new terms to your advantage, you may be able to save a lot of money on your debt as a whole.
If you plan to increase your monthly payments and shorten your payment terms; that can also effectively cut off a huge chunk from your debt payments. A shorter payment term means you will pay less in interest.
This is why you need to be very careful in considering your options before you consolidate your debts with a loan. It is not the end solution to your debt problems. It will help you get there – but you still have a long way to go before achieving debt freedom.
In case you feel like this debt relief process is confusing, you can check with us if you qualify for debt consolidation. National Debt Relief has a lot of debt experts standing by to help answer your questions about debt. You do not have to worry because the initial consultation is free. You will not be forced to pay anything or obligated to sign up.
How long will it take to pay off your debt consolidation loan?
The length of repaying a debt consolidation loan will depend on the terms that you will agree to. Most of the time, debt consolidation loans range between 5 to 20 years. Lenders have different varieties so you need to check with the specific lender that you plan to borrow money from. Some lenders will let you choose between 5, 10, 15 and 20, while others allow borrowers to pay within 7 or 12 years.
You can choose how long you want to pay off the loan. But before you make a choice, it is important for you to understand the effects of having a long repayment plan against having a shorter term.
When you choose to pay your debt consolidation loan over a longer repayment term, your balance will be distributed over a longer period. That means your debt will be stretched and you will end up with a lower monthly payment. This will help you gain some room in your budget plan. This is a great option for those who had been struggling to make ends meet. If you can negotiate a lower interest rate for the loan, this will make your payments even lower. While that will make it easier on your budget, you will end up paying more for the whole loan. A longer term means a longer time for the interest to accrue. You will pay a higher interest amount in total.
When you choose to pay your loan over a shorter repayment term, that will help you get out of debt a lot faster. Not only that, you should be able to save a lot of money on the interest. The interest accrues on the balance of your debt. The longer you have a balance, the more interest will be accrued. If you really want to save money, you need to shorten your repayment plan. If you can negotiate a lower interest rate, that would make your savings even more pronounced.
Will you be able to use credit after a debt consolidation loan?
Yes you can still use credit after you borrowed a debt consolidation loan. But that is not the question that you should be asking. You need to ask yourself if it is a good idea to use credit after you borrow this loan.
The answer to that is no. In fact, using credit after is one of the reason why this debt solution could fail. Technically, you are allowed to borrow money. At least, if your debt-to-income ratio will still allow it and you have the means to pay it back. But given the circumstances surrounding your current debt, it is not a good idea to borrow more money.
As previously mentioned, your debt is not yet completely paid off after consolidating it. You merely transferred the balance into one account so the repayment will be easier. But when it comes to your balance, you still owe the same amount of money. In fact, you may owe more in the beginning because of the fees that you have to pay off to consolidate the debt.
For some people, it is really tempting to use more debt after consolidation. This is especially true if you consolidated your credit card debts. After it is paid off the by consolidation loan, the cards will have a 0 balance. That would make you feel like you just paid off your debts. But in reality, you did not. If you cannot fight the temptation to use your credit card, you might end up incurring a huge balance on it.
It might be a good idea to stop using credit for the meantime. If you can hold it off until you pay off your debt consolidation loan, then that will increase the chances that you will get out of debt a lot faster. However, if you cannot wait that long, then it may be best to at least wait until you have paid more than half of your balance.
In case you really need to borrow money, you need to ensure that you will choose an option that suits your financial situation. And if you have to hire a professional to help you out, it is important to conduct thorough research on it. You can check out reviews sites like toptenreviews.com on debt consolidation. These sites will help you determine what company you can trust to help you get out of debt.
How can you stop using credit while paying off a debt consolidation loan?
To keep yourself from using credit, here are two important tasks that you need to do.
- Build your emergency fund. Sometimes, people make smart financial choices. That should be enough to keep you out of debt – but only if you have enough emergency fund. Your income may be enough to support your living expenses but what if there is a huge finance expense that you suddenly have to pay? Where will you get the money to pay it off? For most people, they will turn to debt. Make sure you will not be placed in this position. Save up for an emergency fund. Ideally, you want it to be enough to last you for a couple of months – in case your main source of income is suddenly compromised.
- Set up a budget. A budget plan allows you to have a general idea of your income and expenses. By listing your income, you will know if what you are earning is enough to support your lifestyle. Sometimes, writing it down makes everything clear. This is also one way for you to control your expenses. You can rank them according to priority and get rid of the expenses that you do not really need. By removing the unnecessary expenses, you can increase your debt payment fund to pay off your loan faster.
Is it possible for debt consolidation loan to make your financial situation worse?
Debt consolidation loan, while it can be an effective way to get out of debt, can also make your financial situation worse. It is important for you to realize that the success of this debt solution will depend on your financial behavior after consolidating debts.
If you really want to make this debt solution work, you have to identify the behaviors that could compromise its success. Here are the mistakes that could damage your financial situation further after you use debt consolidation loan.
- Missing payments. This debt solution simplifies your repayment plan. Instead of monitoring a lot of credit accounts, you are only left with one. The convenience can make you feel too relaxed about paying off your debts. It can make you feel like your debt payments do not have to be the priority. Even if the rates are lower and the terms better than before, you need to continually make timely payments. Any misbehavior will be reflected in your credit report. Remember that your payment behavior is a big part of your credit score. If you miss payments or you pay less than what is required, then you will be penalized for it. These charges will grow your debt. In case you used a secured loan to consolidate, you can lose the asset that you placed as collateral. For instance, if you used Home Equity Loans, your house will be put on the line. If you fail to pay the loan, the bank has every right to foreclose your property. When that happens, you will lose your house.
- Using more debt. This debt relief strategy increases the temptation of using more debt. It can make you feel like your debts are not as bad as you thought. As mentioned, if you consolidated your credit cards, all of them will end up with 0 balance. It is easy to give in to the temptation of using it once more. If you have not paid your debt consolidation loan, this will only make your balance higher than before. If you end up accumulating a lot of debt on your high-interest credit cards, you will be right back where you started.
It is important for you to develop a high level of self-control so you can avoid the temptation of borrowing more money. Also, do not forget that your debt still has to be paid. Do not feel too relaxed about it.
How can debt consolidation loan improve your financial position?
The truth is, debt consolidation loans can help you with your debt problem but it has to be combined with something else. If you combine it with the right behavior and principles, it will not only help you get out of debt, it can also improve your financial position. Here are the different ways that it can help.
Makes payments easier. Debt consolidation loan simplifies your payment by combining the multiple debts into one. You will be left with only one payment each month. It is also easier for you to keep track of the level of debt that you owe.
Increases your credit score. Since payments are easier, you are less likely to miss your due date. At least, if you are not too complacent about your new repayment plan. If you are diligent in keeping up with your debt payments, you can slowly bring your score higher.
Allows you to focus on other things. With the easier payment scheme, getting out of debt will no longer require too much of your attention. That means you can now focus on other areas in your life that require your concentration. You do not have to feel too stressed about your debt anymore. That frees your mind and allows you to think of more ideas to help you improve your financial position.
Gives you a chance to start over. Finally, debt consolidation loan is your chance to start over. You can start paying your debts properly and if you have the discipline to do so, keep yourself from accumulating more debts. Take this opportunity to make better financial decisions so you do not make the same mistakes that landed you in debt.
It is important to remember that debt consolidation loan does not really address the habits that got you into debt. Make sure you identify the reason why you got in debt so you can develop the habits that will help you use credit wisely.