Debt consolidation is not the answer to all financial problems. While these types of loans can be beneficial, it is important for a potential borrower to learn all the facts before making a final decision.
Defining Debt Consolidation Loans
A consolidation loan is a specific loan that allows the borrower to combine several loans or credit card balances into one monthly payment. There are several methods an individual can use to accomplish this such as:
Before an indivdual makes a decision about a consolidation loan, it’s important for him or her to be aware of both the advantages and disadvantages.
Some of the negative features of personal loans include:
On the positive side, debt consolidation loans can be beneficial in the following ways:
Debt conmsolidation is not a way to get out of debt; it is simply a redistribution of the debt into a single payment rather than several payments. It will also not eliminate any of the problems that caused the financial problems inititally. Was the individual out of work? Did he or she have trouble making monthly payments because of too much debt? Was the spending out of control? The key is learning to change the behavior that caused the debt in the first place, and this means the individual must do some work on his budget in addition to obtaining debt consolidation.
Debt Consolidation Can Improve Credit
The first step toward ensuring a healthy financial future is to pay off debt. If your credit is less than stellar, it may be necessary to find debt consolidation loans for bad credit. A consolidation loan allows an individual to combine all debts into one monthly payment including medical bills and high interest credit cards. The interest rate on the loan will depend on the credit profile of the borrower. While a low credit score means a higher interest rate, being able to pay off those debts in a timely fashion will allow those with bad credit to improve their credit scores.
Before contracting with a lender for a consolidation loan, consumers want to conduct some research. There are some lenders and options that make it much easier to obtain a consolidation loan such as:
While it may seem like a quick solution to pay off credit cards with a cash advance, it doesn’t prevent the consumer from running those bills up again. On the other hand personal loan forces an individual to pay off the debt within the terms of a contract. Additionally, a personal loan may possibly increase an individual’s credit score as the debt is restructured to the column for installment loans and out of the credit card debt column. This results because the scoring model penalizes those who use all or most of the available credit on their cards.
Making the Right Choice
For most people choosing a personal loan has significant advantages when compared to using credit cards or continuing to make numerous payments every month. The first thing to consider is the interest rate; debt consolidation loans with bad credit are of no benefit unless the consumer is able to secure a lower interest rate than he is paying on the debts he wishes to consolidate.
Another thing to remember about personal loans is many lenders charge origination fees that range from one to six percent. There are two options for avoiding these fees: develop a systematic means of repaying the debt or finding a lender with little or no origination fee.
It’s common knowledge that the best rates on bank loans go to those with impeccable credit. While this may mean a higher interest rate initially, it can also help improve a person’s overall credit score. It is also possible to find a better rate if you have collateral to pledge such as your home or a savings account.