Loans for debt consolidation are often looked at as a method for handling multiple debts to make payments easier. But this is not the only option for handling multiple debts, especially when you get overwhelmed. As with any loan products out there, there are certain pro’s and con’s with this type of loan. Take time to learn more about them so it does not end up hurting your credit instead.
What is debt consolidation loan?
It is not uncommon for most individuals these days to owe more than one type of debt. Some have credit card debts, while a few others have personal loans and home equity loans. Whatever type of loan you might have, there will come a point in time wherein making sure that each of these get paid on a monthly basis can prove challenging. Whether you have lack of funds or you simply cannot keep up with managing your budget, you might find yourself wishing there was a better way to manage all of those debts.
To put it simply, debt consolidation is the process of combining all of your debts and then rolling them into a single loan. You no longer have to make multiple individual payments per month but rather pay off that single loan. The new loan that you take out will be used towards paying off those other debts you have.
This is the best course of action if you are having difficulty coping with your debt problem. With just one payment to make, it will be easier to keep track of debt payments. And because it is a new loan, you can extend the repayment period to make monthly payments manageable. This will also significantly improve your monthly cash flow so you have enough to cover all other expenses.
Debt consolidation loans can either be secured or unsecured loans. A secured loan is any amount you borrow that is secured against an asset such as your home. If you fail to pay your monthly dues, you could end up losing your home. On the other hand, there is an unsecured debt consolidation loan. This one does not require collateral such as your home. The only downside to an unsecured loan is that you might have to pay a higher interest rate.
Many lenders offer the secured debt consolidation loan option if you 1) have very poor credit or 2) if you owe a lot of money. There are certain risks involved with any of these two types of loans. With a secured loan, you can lose your home or any valuable assets. With an unsecured loan, you could end up in more debt than you initially started with. Make sure you weigh the pro’s and con’s of each, or understand the risks involved with consolidating before you make the decision.
Benefits of Debt Consolidation Loans
Loans for debt consolidation can be a significantly powerful tool if you know how to use this well. There are plenty of benefits that you stand to gain when you know how to manage your finances well and if you can meet monthly payments. These benefits are as follows:
- It gives you the opportunity to obtain a lower interest rate on your new loan versus the existing interest rate on your debts.
- It organises your finances because you can roll your existing debts into one for one easier monthly payments.
- It is a great method to safeguard your credit score because it reduces the chances of missing payments.
- It improves your cash flow because you know exactly how much you must pay each month towards your loan.
Challenges of Consolidating Debts
While there are plenty of benefits as listed above, you must also be aware of the challenges of consolidating your loans. It takes a lot of discipline and understanding of how this process works in order to maximise it. These are some of the challenges you need to overcome:
- There is a possibility that your new loan will have a higher interest rate (especially if you have a low credit score).
- Depending on the size of your existing debts, your new loan might cost more than all of your existing debts combined.
- There might be extra fees or charges involved when you pay off your existing debts early. Make sure to check with your creditors beforehand.
- At Money Pig, we can help you find the right lender that will provide you loans for debt consolidation. Make sure to compare through your options to find the best rate that will save you more money in the long run.
Otherwise, you can also speak to a debt adviser and get help when it comes to managing your debts. You have to be sure that consolidating is the only viable option there is. You might want to look into other types of debt management plans or if you qualify for a debt relief order.
Frequently Asked Questions on Loans for Debt Consolidation
Are you curious to know more about loans for debt consolidation? Below are some of the most commonly asked questions and the corresponding answers you need to know:
- What are loans for debt consolidation?
- How does a debt consolidation loan work?
- What loans can be consolidated?
- Who can apply for a debt consolidation loan?
- When should you consider a debt consolidation loan?
- When does getting a debt consolidation make no sense?
- What are common fees and charges for debt consolidation loans?
- Can you get a loan for debt consolidation?
- Do debt consolidation loans hurt your credit?
- Do banks help with debt consolidation?
- What score do I need for a debt consolidation loan?
- How long does debt consolidation stay on your report?
- Why was I declined for a debt consolidation loan?
- Can you get a debt consolidation loan with bad credit?
- What are the disadvantages of debt consolidation?
- Are debt consolidation loans worth it?
- How do you get approved for a debt consolidation loan?
- How long does it take to get approved for loans for debt consolidation?
- What is the average interest rate on debt consolidation loan?
- Can Money Pig help with loans for debt consolidation?
What are loans for debt consolidation?
Loans for debt consolidation are a specific type of loan that is used to combine all of your debts from multiple creditors into one. You will be taking out a single loan that is used to pay off any existing debts you have. Once those debts are rolled into one, you can get one new loan with a reduced interest rate that you will pay off (rather than dealing with multiple loans).
This type of loan is designed to make it easier for borrowers to keep track of their loan payments. It can be overwhelming when you multiple bills to settle each month. By rolling all your debts into one, it makes it easier to manage monthly payments.
How does a debt consolidation loan work?
Debt consolidation loans work the same way as any other type of loan. You will go through the same screening and evaluation process for approval. The only difference is the purpose of the loan. You will be using the loan to pay off your existing multiple debts so you can get a single, brand new loan. Instead of paying several loans per month, you will have the new loan to focus payment on. You will also be calculated with a new interest rate for that new loan.
The idea behind this type of loan is that by combining them into one monthly payment, you are less likely to miss your payments.
What loans can be consolidated?
There are multiple types of loans that can qualify for debt consolidation. The first one is a home equity loan. This type of loan allows you to use the equity of your home as collateral for the loan. You can also consolidate your credit card balance transfers. If you have multiple credit cards, you can roll them into one card with a low-interest rate so it is easier to manage payments. You can also consolidate your personal loans. It is a type of unsecured loan with a fixed interest rate over a given period of time.
You may choose to consolidate these loans to combine your debts. You can ask your lender if any of your existing loans can qualify to be consolidated.
Who can apply for a debt consolidation loan?
Anyone is qualified for a debt consolidation loan. The eligibility criteria vary from one lender to another. It is important to check the eligibility requirements of your lender in order to see if you will be able to get one.
When should you consider a debt consolidation loan?
There are several reasons why you might want to consider getting a debt consolidation loan. The first and primary reason to consolidate your debts is to cut on your spending and lower monthly payments on your debts so they are easy to manage. Instead of having multiple loans and debts to pay, you are only paying one debt and with a lower monthly fee. This will significantly reduce the payment you will have to make per month so you have more room in your budget. It is also considered as a great method to get back on track with your finances as long as you never miss a payment.
If you choose where to consolidate your loan wisely, you can qualify for a lower interest rate (as compared to your existing loans). Make sure to check the repayment period, though, as it can still impact the overall cost of obtaining a new loan.
Again, as long as you stay updated with your monthly loan payments, you will be able to repay your loan within the repayment period (or less). To help you decide, you should seek debt advice before choosing to consolidate.
When does getting a debt consolidation make no sense?
While there are instances when consolidating your debts makes sense, there are also situations when it might not be as beneficial. It is important that you take this into consideration so it won’t end up hurting your credit.
If the monthly payments on your new loan is still too expensive for you to afford, then you might want to think twice before pursuing loans for debt consolidation. It should be avoided when you are unable to clear all of your debts with this loan. And as mentioned above, you need to calculate the overall cost of the loan (by multiplying the monthly payments with the number of months or years to repay).
If you are not sure about your choice, it is best to seek advice from a professional. In some cases, you might be better off negotiating with your creditors about possibly lowering your interest payments. Some lenders and credit institutions would be open to negotiate, especially if you have a good payment record.
What are common fees and charges for debt consolidation loans?
When you choose to consolidate your debts, it is important to check for any hidden fees and charges that you might incur. One of the things to be on the lookout for are the fees charged by your creditors if you choose to pay off your loan early. If there are charges involved, it could cancel any savings you make when you consolidate.
It is also important to read the fine print when you enter into a debt consolidation loan agreement. Make sure any charges and fees are fully disclosed (if any).
Can you get a loan for debt consolidation?
Majority of the lenders that provide debt consolidation loans offer an unsecured loan. Unlike secured loans wherein you must provide collateral, unsecured loans are based on the merit of creditworthiness. People with bad credit might find it difficult to qualify for this type of loan (although not impossible). Make sure to check what the credit score and other eligibility requirements are before you apply.
Do debt consolidation loans hurt your credit?
No. In fact, if you manage your payments for debt consolidation loan, it can give your credit standing a boost and improve your credit score, too. The only way this type of loan can hurt your credit score is if you fail to meet your monthly payments on the new loan. Make sure you are able to pay off your loan within 30 minutes of the due date.
It is also going to hurt your credit score if you continue to take out other debts. Any gain that you have on your credit utilization will go away once you acquire new debts.
Do banks help with debt consolidation?
You can get debt consolidation loan from a bank. However, you can expect a more stringent set of eligibility criteria than most lenders and other credit institutions. If you choose to consolidate through a bank, make sure that you compare the APR or annual percentage rate. This will help maximise the savings you make when you roll multiple debts into one new loan.
What score do I need for a debt consolidation loan?
The minimum credit score required to obtain debt consolidation loan will vary from one lender to another. Some lenders will require a minimum credit score of 630. Other lenders might set that higher or lower. Even if you have a lower credit score than the minimum threshold required by a lender, it does not mean that you won’t qualify. You will be able to qualify for the loan but you will get a higher interest rate.
The minimum requirement for every lender will vary significantly. It is important that you do your research and compare the requirements by each lender. If you can use an online loan broker, it will be to your advantage so that you can improve your approval rate.
How long does debt consolidation stay on your report?
The debt consolidation will stay on your report for as long as the individual debt accounts are reported. This means that it will stay on your report for at least 7 years after those accounts are settled. The reason for this is that debt consolidation is considered as a form of settlement rather than paying it in full.
Why was I declined for a debt consolidation loan?
There are three common reasons why you might be declined for a debt consolidation loan. The first reason is that you have a very low credit score. The second reason is that you have too much debt and you do not qualify for the amount needed to pay off all of your existing debts. And finally, your income does not qualify for the monthly payments on the newly consolidated loan.
Can you get a debt consolidation loan with bad credit?
Yes. People with bad credit can still qualify for a debt consolidation loan. The only downside is that you might be charged with a higher interest rate. With a higher rate, you could wind up paying more on the newly consolidated loan than you would with all of the individual accounts you owe. Make sure to shop around to find the best rates so you can see a significant amount of savings when you consolidate your existing debts.
What are the disadvantages of debt consolidation?
There are many potential drawbacks that you need to be aware of when you obtain loans for debt consolidation. One of the main drawbacks is that you must have a good credit rating to obtain this type of loan at a favorable interest rate. This is actually counteractive because most people who need to consolidate loans are the ones with a less than stellar credit rating. As a result, the payment you make might not be significant enough to improve your financial situation. In fact, the higher interest on the new loan can be offset any potential savings.
Are debt consolidation loans worth it?
It depends on your individual financial situation. Debt consolidation loans are worth it if you can manage the monthly repayments. If not, you will be at risk of acquiring more debt and causing a negative impact on your credit score. You should also be wary of debt consolidation loans with high interest rate or longer repayment period because these can counteract any potential savings you make when you consolidate your loans.
How do you get approved for a debt consolidation loan?
In most cases, anyone with a credit score of 550 and above can qualify for a debt consolidation loan. You can still get approved for debt consolidation with a lower credit score, but your interest rate will be significantly higher. If you want to reduce the interest rate, you might want to work on improving your credit score first. Also, if you already have a bad credit, you might want to talk to a debt adviser if it would be a smart idea to take on a new loan.
How long does it take to get approved for loans for debt consolidation?
The approval process for loans for debt consolidation will vary significantly. If you have a good credit score or you meet the minimum credit score requirement, you can get approved for a loan fast. On average, the processing for this type of loan can take anywhere from 30 to 60 days. Make sure that you check the complete list of requirements and comply with them to streamline the application process.
What is the average interest rate on debt consolidation loan?
The interest rate that you can get when you consolidate your loans varies from one lender to another. Each lender uses a variety of algorithms to determine the actual rate. But to give you an idea, the average interest rate is at 18%. Depending on your credit score, you can get an interest rate for as low as 8% to as high as 28%.
Can Money Pig help with loans for debt consolidation?
If you are in need of loans for debt consolidation, Money Pig can help you find the right lender. We provide you with an extensive network of lenders in the UK that can provide debt consolidation. It can save you time and effort in finding the right lender that would be able to pay off all your debts and offer you a new loan.
Since we provide a wide range of lenders to choose from, you can find one that can give you the most favorable interest rate according to your financial circumstances.