Everything You Need To Know About A Debt Consolidation Loan
Is it time for a debt consolidation loan? Here’s what you should know.
For consumers swimming in debt, a debt consolidation loan can be a lifesaver. Instead of paying off numerous credit card bills and loan payments every month, you package all of your debts into one loan. Simply combining your monthly obligations into one affordable payment, you consolidate your debt accounts, which, in turn, lessens the stress of dealing with multiple creditors.
As with any financial transaction, however, debt consolidation loans carry pros and cons. On the plus side, instead of paying off several bills each month, you are responsible for only one payment, thereby making your debt load more manageable. And with a debt consolidation loan, you could possibly negotiate a low interest rate. Further, and probably most important, since you are paying off all of your debts (unlike a debt settlement, which reduces the principal amount), your credit rating won’t be dinged by a debt consolidation loan.
Yet, debt consolidation loans come with several disadvantages, too. You may be paying off your debts over a longer period of time, thus increasing your overall interest costs. Depending upon which type of debt consolidation loan you obtain, if you default you could lose the loan collateral or damage your credit score. And unless you confront the source of your ballooning debt and tame your out-of-control spending habits, you’ll find only temporary relief from a debt consolidation loan.
Should I apply for a debt consolidation loan?
There are no hard and fast rules to follow as to when to seek a debt consolidation loan. Much depends on your debt burden and whether you can obtain a debt consolidation loan to cover that amount.
Some questions to ask yourself before applying for a debt consolidation loan: Are you falling behind on payments? Are you getting calls from debt collectors? If so, a debt consolidation loan presents a workable solution to your debt load.
Emotions also play into the decision: If your debt causes constant stress, you may want to consider a debt consolidation loan to eliminate the anxiety.
A debt consolidation is also a viable option if you want to avoid damaging your credit score or filling for bankruptcy. Here’s what you need to know before securing a debt consolidation loan:
What types of debt consolidation loans are there?
There are two types of debt consolidation loans:
Secured loan. A secured loan is backed by some type of collateral, usually a car or home. By putting up collateral, you can probably get a larger loan amount at a lower interest rate. Also, the interest on a secured debt consolidation may be tax deductible.
The major risk associated with a secured loan is you may lose the collateral if you fall behind on payments. If you want a secured debt consolidation loan, your best options are either a traditional bank or credit union that typically require some type of collateral to mitigate the risk of a loan default.
Unsecured loan. To attain an unsecured loan, you put up no collateral. Yet without any collateral to back the loan, you will likely be charged a higher interest rate and are limited on the size of the loan you can obtain. No tax benefits accrue with an unsecured debt consolidation loan. With an unsecured debt consolidated loan, you preserve your real assets; however, if you default, you credit rating takes a major hit.
The good news is there are many alternatives if you seek an unsecured debt consolidation loan. A bank or credit union can provide a personal loan, although the process may be drawn out.
Besides a personal loan from a bank or credit union, many online peer-to-peer lenders offer unsecured debt consolidation loans. Peer-to-peer lenders operate as crowdfunding sites: Borrowers submit a loan request, and individual investors add the funds. With a loan in hand, you make monthly payments.
Before working with a peer-to-peer lender, research the terms, which can vary widely. Although your loan’s interest rate depends on your credit score, you want to work with a lender that offers a competitive rate. You will be charged a fee, so shop around for a reasonable one. Furthermore, just because you find a peer-to-peer debt consolidation loan lender online does not mean it operates in your state. Lastly, seek out lenders with an A+ rating from the Better Business Bureau.
How do I get a debt consolidation loan?
Whether you apply at your local bank, credit union, or an online debt consolidation lender, you must meet certain criteria. On the top of the list are:
- Solid credit score. To secure a debt consolidation loan, you need a fairly high credit score. For example, some lenders require a credit rating of 640 or higher.
- Steady income. Having a job ups your chances of getting a debt consolidation loan.
How do I know I’m working with a reputable debt consolidation loan company?
A debt consolidation loan can be an expensive and risky endeavor. So before you sign on the dotted line, be on the lookout for these warning signs you may be working with a fraudulent operation:
Using aggressive sales tactics. A reputable debt consolidation loan organization does not forcefully pursue potential borrowers. They wait for the borrower to come to them to work out a loan. Walk away anytime you feel pressured to close a deal in a short amount of time, say, one to three days. A debt consolidation loan is a major financial decision, so take as much time as you need to feel comfortable with your choice.
Selling more than a debt consolidation loan. Sometimes, an organization claims to be a debt consolidation loan provider, but what it’s really trying to sell is something else, on top of the loan or different from the loan. Make sure that you are getting just the debt consolidation loan for your debt needs.
Charging upfront fees. While debt consolidation loan providers do charge fees for their services, you should never pay for merely applying for a debt consolidation loan.
Promising a loan without reviewing your credit history. If the loan provider hints you can get a personal loan without first looking at your credit score or income, you may be dealing with a shady operation.
For many consumers, a debt consolidation loan is a viable alternative for debt relief. Before you enter into a contract, research all your options to ensure you make the best deal and are working with a trustworthy firm.