Most people find it hard to clear debts that pile up to huge amounts. Therefore, they end up defaulting, making the interests to escalate, and consequently, paying the debts becomes impossible. If you are struggling with such debts, then this article is for you.
Understanding what consolidation loans are
A debt consolidation loan is one loan taken to help clear several outstanding loans. The outstanding loans can either be personal loans, credit cards, or home equity. You take one loan, pay off the rest, and begin clearing the consolidation loan.
Mostly, such loans are extended to borrowers by banks, online lenders, or credit unions at a fixed interest rate. That is one of many benefits of taking a debt consolidation loan. Also, you can pay off this loan for at least two years or as long as five years, depending on the amount borrowed.
Reasons why you should take a consolidation loan
There are various advantages of taking consolidation loans. Let us look at how consolidation loans can be beneficial to you;
1. Regular loans have many challenges when it comes to collection. You will get several calls from the lenders, and that will affect your peace and comfort. You only get one call when you have consolidated your loans.
2. Repaying several loans can be a challenge, especially because you may sometimes forget to clear other loans. For consolidation loans, you repay to one account, and therefore, there is no chance of forgetting to repay at any time.
3. Since you do not forget to repay loans quickly, your credit records become better. Therefore, there is a chance that you will have access to higher loans in future.
Differentiating Secured and unsecured consolidation loans
Under consolidation loans, you also find two main categories that can be either secured or non-secured loans. Also, there are different subcategories under these two.
As you know, a secured loan is one that has a backup of either property, car, or home. That also applies to consolidation loans. A security item is what makes the loan secured in an event you do not repay.
Unsecured loans are the exact opposite of secured loans. You only give the promise to repay the loan. Mostly, you can access unsecured loans on online platforms because you do not meet with the lender, meaning there is no form of security.
If you choose to go for a secured loan, you get assured of high loan limits. Also, there is a low-interest rate, which is also tax-deductible. However, there is a risk of paying more because they have long repaying terms meaning interest may be high. Also, you risk losing your collateral if you fail to repay in time.
Unsecured loans have generally shorter repaying terms meaning you do not pay high interests. Also, there is no asset risk because you do not include any assets in your agreement. However, you may qualify for a lower amount and fail to enjoy tax benefits.
What to do before going for a consolidation loan
As mentioned earlier, you can access these loans from banks and other lending institutions. However, friends and relatives are also a great source for such loans. However, you always need to do some homework before taking a consolidation loan.
Find out what is your credit score by requesting a free credit report. That can help to guide you on the loan amount you qualify for at the moment if any.
Next, you should go ahead and find out whether the loans you have need consolidation. Sometimes, you do not have to consolidate loans. For example, you may need to consolidate a credit card loan and not a mortgage.
Consider your monthly budget at the moment. Always remember, consolidation loans just reduce the hassle involved in repaying multiple loans. Therefore, ensure you can repay it monthly and still afford the basic necessities.
Things you should not forget when taking a consolidation loan
You should do a background check on what various lenders are offering. Mainly here, you need to check out their lending terms. The loan terms here are mostly debt consolidation loan rates.
Evaluate what your monthly expenditure is. If you need to take a consolidation loan, your monthly pay should be able to sustain you through, and you should be able to repay without forgoing your other monthly bills.
You should always have your consolidation loan in mind. Be faithful to repaying it every month in full installments. If you fail to repay your consolidation loan, then that means you are not ready to take control of your debts altogether.
Debt consolidation is one of the best shortcuts for clearing many outstanding loans. Having all your loans in one account not only helps you reduce the amount you repay every month but also building your credit report.