A Guide To Debt Consolidation Loans
It is easy for the average consumer to accumulate a considerable amount of debt. With the ever-rising living expenses and accruing interest, it can be quite a challenge for consumers to pay back these debts and retain a high credit score.
Those who have several debts, such as credit card debts, car loans, personal loans, payday loans and other short term loans will have a more difficult time since they have to remember the due dates for the different loans as well as the loan amounts and the accounts to credit the payments to. It is important to note that consolidation of debts is the best solution for consumers who have several debt obligations, which they are current on, but may default with time. Read on to learn more.
What is Debt Consolidation?
This is the process of summing up all your debts and paying the outstanding balance with a new, but more affordable loan. For instance, if you have an outstanding debt of £5,000 on your credit cards, a £6,000 balance on your car loans, and a £6,000 personal loan balance, you can take out a debt consolidation loan of £17,000 and clear all these loans.
The end result will be a single loan of £17,000, which you can pay over a longer period of time and at a much lower rate of interest. It is important to note that the debt in question can be secured loans, unsecured loans, bridging loans, home improvement loans, bad credit loans or guarantor loans. If you have several payday loans or doorstep loans, you can also include them in your debt consolidation plan. There are many benefits of using debt consolidation loans to clear your debts. They include;
- i) Convenience
The main benefit of debt consolidation loans is convenience. This is because they make it possible for the borrower to make a single monthly instalment to offset their debt. Anyone who has multiple loan obligations that fall due on different dates will appreciate this. There is always the chance that the debtor may forget to pay one or more loan instalments, and this will lead to a negative report on their credit report. Therefore, consolidation of debts makes life convenient for the debtor and improves their chances of paying off their debts without defaulting.
- ii) Save Money
Consolidating your debts can save you money in a number of ways. For starters, you will save on reduced interest payments if you have bad credit loans, payday loans or any other loan that comes with a higher rate of interest than the prevailing market rates. For this reason, it is always a good idea to check the applicable APR offered by different lenders on their debt consolidation loans to ensure you get the best deal possible.
Secondly, consolidating your debts can save you money by helping you to avoid late payment penalties and rollover fees that payday lenders and other types of lenders normally charge.
iii) Build Your Credit
Credit ratings normally improve when positive reports are added to your credit scorecard. When you consolidate several loans and pay them off successfully, your credit will improve. Furthermore, taking out a larger loan to pay off your debts and servicing the loan accordingly will help to improve your credit score further.
- iv) Change Your Due Date
When you take out a new loan to pay off existing debts, you will get the chance to choose a convenient due date for the loan. If you are comfortable paying your monthly instalments on the 15th day of every month, then you can choose that date. This will improve your chances of servicing the debt accordingly.
- v) Reduce Your Monthly Payments
If you simply cannot afford to honor your debt obligations, taking out a new loan to offset your debts will give you a chance to reduce the amount of money you will be required to pay monthly by spreading the payments over a longer period of time, of say 5 years. For instance, if you were required to pay a total of £1,200 monthly for 2 years, you can stretch out the new loan over a term of 5 years to reduce the monthly instalments to around £550, which is much more affordable. In fact, this is one of the main reasons why consumers normally consider debt consolidation.