All about Debt Consolidation Loan

What is a debt consolidation loan?

Debt consolidation loan is a personal loan that you can take out from a financial institution or a lender to pay off your pending debts. It combines all your multiple debts and replaces with a single loan. It is one of the viable solutions that offer debt relief to financially crunched people.
What are the different types of debt consolidation loans?

Debt consolidation loans can be either secured or unsecured. In case of a secured debt consolidation loan you have to place collateral to obtain the loan amount. Most of the people put their homes as security to take a loan. Unsecured loans do not require collateral, and are based entirely on the character and capacity of the borrower to repay.
Are you the right candidate for debt consolidation loan?

* If you have multiple loans from different lenders and face problem in sending checks to different creditors at different dates.
* If you are facing problems in staying current on the payments.
* Your existing debts have different interest rates but you would like to have one interest rate for everything.
* You want to reduce the amount of money that goes towards monthly repayments.
* If you are a home owner and want to leverage your residence's value to pay off your credit card bills, store card bills or any other kind of debts.

What are the documents you would need to qualify for a debt consolidation loan?

* A copy of your monthly budget needs to be produced to a bank in order to determine if you can meet your loan payments.
* You must be having a steady source of income to allow you to repay the loan
* You may require a co-signor or collateral (like a car or a house).

What inquiries should you make before opting for a debt consolidation loan?
You should make some important verification before opting for a debt consolidation loan.

* Fees charged: Avoid those companies that charge high fees before even providing any services. Such companies might claim that they can reduce your debt. But in reality they might take advantage of your situation.
* The interest rate: Interest rates on the loan vary; for instance, the interest rate charged on a secured loan is lesser than the rate charged on the unsecured loan. Therefore, check the interest rate before you opt for a debt consolidation loan.
* Monthly repayments: Make sure that the amount of repayment is less than the amount you were paying before the consolidation.
* Effect on your credit score: Assess your current financial situation because if you fail to pay the loan amount on time, it will affect your credit score adversely. Avoid lenders who are not clear on this issue.

What steps should you follow while applying for a debt consolidation loan?

* Take a realistic look at the total amount of debt you owe.
* Next work out a monthly budget with income and expenditure and make sure you include an amount for emergencies.
* Work out exactly how much you want to borrow with your debt consolidation loan.
* Get your consolidation loan.

Can debt consolidation loan really free you from debt?

Yes, it can but it is important that you stick within the budget guidelines. Consolidation loan will only solve your debt problem if you stop overspending. Or else, in two or three years you will find yourself running your credit cards up to the same levels or even higher than they were before you took out the loan.
What are the advantages of debt consolidation loan?

* Debt consolidation loan saves you from paying high monthly bills and high interest rates. A practical way to consider the benefits of a debt consolidation loans is to take a look at the Annual Percentage Rate (APR) offered.
* A debt consolidation loan helps you in paying off your existing debts.
* Instead of multiple payments you have only one payment to make every month, which in turn helps you in managing your finances properly as well as reduces the chances of missed and late payments.
* Dealing with one creditor also reduces the pressure you experience while handling multiple creditors.

What are the disadvantages of debt consolidation loans?

* Debt consolidation loan allows you pay low monthly installments and interest rates, but it involves longer repayment period. Thus you end up paying more to become debt free.
* You have to pledge assets like your car or home in order to obtain a secured debt consolidation loan. In case you fail to make the payment on time you might lose your assets.
* The borrower has another loan (especially a lump sum of loan money) on his name to pay off and it can at times adversely affect his/her credit report.
* Debt consolidation loan can only offer short-term relief to a borrower. It does not stop him from taking up multiple loans again or cure his bad spending habits.