It is not uncommon these days for a person to have more than one debt to a bank, another financial institution, a credit card company or private lenders. The relatively easy access to credit cards with decent limits and instant loans made it possible to have different types of financial obligations with various interest rates and payment dates. Usually, this may result in getting very difficult to manage and follow up on payment plans and structures and eventually leads to compromising your credit history.
One possible solution for those with number of credits (bad credits or especially unsecured ones) is the debt consolidation loan. It is a financial tool to ease repayment and to put your finances back on track. Basically, it means to take out a new loan tailored to take care of multiple existing debts and liabilities such as credit cards, consumer loans, instant loans and in general any type of financial debt.
What is debt consolidation loan and how does it work?
A very important thing to consider is that the debt consolidation loan does not erase or eliminate your debts. On the contrary, it is intended to consolidate all your outstanding debts into one new debt for the total amount of the old debts (plus interest) into a new loan under new terms and conditions which are typically more favorable in terms of repayment time and interest rates. Using debt consolidation loan would simply mean you would have one new maturity date, one new fixed interest rate and one single debt. This may significantly improve your credit history score even if some of the debts you are consolidating are already considered as bad credits. Debt consolidation loan would also mean you get rid of debt collectors and constant reminders of overdue payments.
Impact on your credit score
Debt consolidation has numerous advantages for debtors – easier to follow up, cleaning up of bad credit, one bill to be paid monthly and installment that is more acceptable than several ones.
Still, debt consolidation loan is not a certain loan you should just take out simply because you are facing hard times. This kind of tool works under pretty much the same conditions as any other loans. It is sometimes required to secure your new loan to ensure your new lander with repayment. Assets, such as movables and immovable property serve that purpose. Of course, your credit rating is what helps in the evaluation for debt consolidation loan. Your income is also of importance. It is common practice for some banks to offer their clients better options for debt consolidation loans than a new bank or financial entity. This way, they keep you as a customer and improve your credibility.
What you should pay attention at when considering a debt consolidation loan?
Applying for a debt consolidation loan indicates you have the very intention to repay your debtors even if you are facing difficulties. It is often embraced by debtors simply because this makes their credit to you more likely to be collected at some point. However, you must keep in mind a few peculiarities that may affect you.
First, although clearing your bad credit and current multiple loans may save your credit history in the long run, seeking and receiving consolidation of your debts means you are unable to meet your expenses properly, making you seem like you are not a very reliable debtor. Given that, changing your initial contracts with lenders may have a slight initial bad impact on your credit score. Second, since this consolidation changes your situation, this means longer term for repayment for the new loan compared to the original arrangements under the old loan agreements. So, you will be paying less a month for an extended period. Thirdly, you are highly likely to be required to produce collateral, especially if the debts you are consolidating are unsecured or are already viewed as bad debts. Given this, your assets would be at risk if something goes wrong. If you had any preferences provided to you in servicing your previous loans, the debt consolidation would no longer support those. These may be special rates, options for delay, give-back bonuses, or discounts. Those would automatically expire once you consolidate your debts.
In general, a decision to consolidate your current debts under a new loan is not to be taken lightly. Debt consolidation loan is as serious commitment. If you have a lot of debts but you can still cope with paying on time, you are not hard pressed to seek for that solution. It is recommended to revise your loans, debts and the options for repayment provided by your current lenders. Some have different options and repayment programs that could help improve your situation. If none of your current lenders is willing to consolidate and they are seeing you more like a risk, you could turn to alternative options, such as private lenders and private mortgage companies. Nowadays, special companies offering only debt consolidation loans are available too. They specialize in this kind of financial instrument and they are open to providing solutions when other companies would not.
Fees applicable to your new debt consolidation loan
Another important aspect that you should pay attention to is the fees for reviewing and approving your application for debt consolidation loan. Utilization fees may also apply, depending on the policy of your new lender. These may be costly and should be examined in advance to avoid unpleasant surprises. If affordable, you could ask for those to be deducted from the new sum of the loan. The companies for debt consolidation loans often do that in exchange these fees are usually more expensive.
How to choose which debts to consolidate?
A normal question would be how to choose your debts for consolidation. The easiest answer would be to explore carefully which of your debts burden you the most and which have turned into bad credit or are endangered to be bad credit soon. Sometimes, your new lender may suggest or demand a plan for consolidation after reviewing your debt history. In most situations, your creditors would be lined up with repaying the highest rate ones first. Your personal loans (family and friends) are to be repaid as well and timely, but chances are banks and credit providers would not be as patient in repayment.
Financial discipline and planning would help you out, as well as consultation with financial experts. Bad credit and uncertain income may stand in your way, your assets may prove to be insufficient. Lumping your outstanding debts into a single debt is most often undertaken when you are overwhelmed by payments.
Possible types of debt consolidation loans
When deciding whether to consolidate or not, you should bear in mind that there are different types of consolidation. You could consolidate a few credit cards into one with a longer interest-free period or lower interest. You could combine several consumer loans into one with better repayment plans. Or you could simply combine all outstanding payments under a new larger secured loan. It all depends on what you need and what you qualify for. You should always be cautious that you are not debt-free, regardless of the chosen method for consolidation of debts. Your liabilities is just simply restructured and renegotiated but still under terms and conditions you should observe. You should remember that the debt consolidation loan does not just address reducing the number of creditors you have. It is aiming to reduce your liabilities. Your credit report would still reflect how you have kept up with your new payment arrangement and this could influence your credit future.
Necessary documents for extending of a debt consolidation loan
There are several documents you may need for your debt consolidation loan,. You should typically prepare proof of your existing debts, proof of income, any letters from debt collectors and others, depending on the requirements of your new lender. The new lender usually reserves the right to decline your application or alter the offer for debt consolidation loan based on their assessment of the information you have provided. This may end up in less favorable conditions than expected and a prolonged repayment term.