What you Need to Know about Taking a Debt Consolidation Loan
Debt consolidation using a consolidation loan is a common option available to most people struggling with credit. With a consolidation loan, you get to merge several smaller loans into one so as to get one monthly repayment that’s easier to manage. Technically, it’s not possible to merge different loans such as an overdraft balance and credit card debt because each has different repayment terms and interest rates. What happens during consolidation is that you get a new, larger loan and you can use the money to pay off smaller loans that have stricter repayment terms.
- Once you consolidate your smaller loans, you get one monthly repayment that’s more convenient to make. This gives you peace of mind and reduces the risk of missing or making a late payment.
- Most lenders offer these loans at lower interest rates. This means that if you have smaller loans like credit card balances with high interest, this loan can help you to save money.
- With this kind of loan, you get better timelines to clear this credit. In most cases, you will be given 2 to 5 years to clear the loan, which allows you to better plan your future.
- Debt consolidation loan application fees are usually very low which helps you to save and spend more on getting out of debt.
- With a debt consolidation loan, you have a good chance of improving your credit rating because of the reduced interest payments. Taking this loan doesn’t in any way lower your credit rating if you meet the agreed terms.
- You will probably need to provide some form of security for this loan. This could be a car, your home’s equity. If you fail to meet your monthly obligation, you risk losing this collateral.
- Combining smaller loans can leave you with a large monthly repayment that’s hard to manage. You may end up struggling with one large loan; just the same way you did with 6 smaller loans. It’s important to ensure that a new loan comes with repayment terms that are manageable for you.
- If you take the loan without acquiring proper financial discipline, there’s a high risk that you will fall further into debt. This especially happens when you have access to your older credit cards.
- For you to qualify for this loan, the lender will often require you to have a good credit standing. This may not be a viable option if your credit score is really poor.
- You may get a lower interest rate by taking a home equity loan instead. This helps you to save money in the long run.
- If you qualify for debt consolidation Torontowithout any collateral, expect to pay even higher interest rates.
For you to qualify for a debt consolidation loan, you may need a good co-signer who will be responsible to clear the loan if you are unable to. Talk to a credit counselor who will advise on what best works for you.