A debt consolidation loan helps you in consolidating your multiple unsecured debts into one, easy payment loan. You repay the new loan through single monthly payments.
How can a debt consolidation loan benefit you?
- Multiple monthly payments can be replaced with a single affordable payment
- Lower interest rates than credit cards and can eliminate collection calls
- May opt for a long-term loan to reduce the monthly payable amount
- Budgeting gets easier as need to manage only a single payment
- May have a positive impact on credit score
Is there only one type of consolidation loan?
No, there are 2 types:
- 01 Secured loans – Such as mortgage loans
- 02 Unsecured loans – Such as personal loans
Student loans – Can be paid through secured/unsecured debt consolidation loans
What is the right time to take out such a loan?
- You cannot stay current on your bill payments
- Want to replace multiple bills by one single monthly payment
- Find it difficult to manage multiple accounts and several creditors
- Want to save money after making monthly payments
Is there any eligibility criteria?
Yes. You need to qualify the following eligibility criteria:
- You should have a good credit score
- You need to have a source of monthly income
- Existing dues should not be too low
What do you need to do before applying for such a loan?
- Calculate the balance amount – Calculate total amount you owe as it will help you decide how much you need to take out.
- Check your credit report – Identify financial/credit problems, which can be eliminated using low debt consolidation loans.
- Identify types of bills – Identify the high-interest bills you want to consolidate. It is better not to include debts with low interest.
- Plan a budget – You should plan a budget so that you can obtain a loan, which is affordable for you.
How can you take out the right loan?
- 01 Shop around – Check out the interest rates, company profile, and service background of several financial institutions.
- 02 Watch out for the cost – Make sure the company breaks down the cost, and you're aware of what you have to pay.
- 03 Add up interest and fees – Calculate your monthly payments, interest rates and charges on your existing bills, and compare the figure with what you have to pay monthly for the consolidation loan.
What is the cost associated with a consolidation loan?
You may have to pay a fee to take out a personal/consolidation loan. Also, you should shop around and take out a loan from a financial institution, which charges relatively low-interest.
What are the disadvantages of such a loan?
- You may end up paying more if you take out a loan with a longer repayment term
- These loans do not provide you with any tax benefit; interest on a personal loan is not tax deductible