Have you found yourself in debt with no possible way out?
When it comes to personal finance planning, debt is the ugly four-lettered word that everyone tries to avoid.
Unfortunately, unexpected expenses such as medical treatments, home repairs, or trips often pave the way to debt.
These unexpected costs normally cause people to default on important deals such as mortgage payments, car notes, or student loans; and because these bills are non-negotiable, some are left with no choice but to apply for a loan or credit card to make the payments.
This often leads to further debt and usually ends in bad credit or repossessions.
If you find yourself with debt or letters from collection agencies, it isn’t too late to save and possibly repair your credit.
If you have too many debts to pay you can use the option of applying for a debt consolidation loan.
What are debt consolidation loans?
Unlike your traditional loan, debt consolidation loans are used to pay off outstanding debts. All of your debt is added up to create the amount.
Instead of paying a number of different creditors each month, you take out one big loan and pay off all those accounts. Then you make a single payment on that loan once a month.
Although it is possible to use debt consolidation loans for debts that are already on your credit report, it is better to use this option before the debt goes to your credit, in order to save it.
However, if the debt is already on your credit, using debt consolidation loans to pay it off converts your “unpaid” status to a “paid” status, which over time improves your credit.
Interest rates and repayment period
The interest rate on debt consolidation loans vary depending on the lender. Also, your credit history will dictate the interest amount.
If your debts have already defaulted to your credit, you may have a higher interest rate and will be expected to pay higher monthly payments to the lender.
The longer your repayment period is, the smaller your payments will be.
However, most people want to go with a shorter repayment time to minimize the risk of not being able to repay the lenders. Since most banks don’t have a set scale for their interest rates on debt consolidation loans, it’s best to ask the loan specialist before applying.
Qualifications for debt consolidation loans
In a nutshell, most lenders are looking at your:
- Repayment history – Do you have a habit of defaulting on payments?
- Stability – Do you make steady income? Are you a home owner?
- Credit score – Is your credit file riddled with non-payments? Is your score fair or very poor?
- Equity – Does your property hold any equity?
Most banks require you to have a steady income and fair credit. Your credit score will determine whether you’re approved for the loan and the loan’s interest rate.
It is also common for a bank to ask for collateral to secure the loan. If you don’t have collateral you may still be approved, but with a higher interest rate. When filling out the application for the loan, you will be asked about the type of debt you’re repaying.
If you’re repaying simple credit card debt or past due bills there won’t be a problem; however, it’s unlikely that you’ll be approved for the loan if you’re paying back secured debt. Secured debts are defaulted payments on property such as a car, office space or your home.
Remaining debt free
Debt consolidation loans are the lifesaver to millions of people who find themselves in unexpected debt. However, better spending habits can prevent you from going into further debt or into future debt.
Practice good spending habits even after applying for your loan. After all, would you really want to go through this all over again?
Final tip: It may be easier and convenient with one monthly payment through a debt consolidation loan, but you still must do your homework and research to ensure a debt consolidation loan is going to actually save you money.
Have you ever considered using debt consolidation loans?