When you have multiple loans at the same time it becomes difficult to manage them all and this may lead to missing a repayment that may further lead to lose of your home or a low credit score. Personal debt consolidation loans entail bringing together all or most of your loans as one debt so that you can have a single loan repayment each month. It is mostly used by people struggling to manage and pay off their current outstanding debts.
Debt consolidation can occur in two ways:
- Credit card balance transfers: Shifting credit card debts to a 0% or low interest rate balance transfer credit card. This does not require securities but you must have a good credit rating to get one.
- Personal loans. In this case, you borrow enough money from a bank or credit union to pay off all your current debts and owe just one lender. You can then close down the other credit cards and loan agreements. The new loan balance will be a summation of the other multiple loans. (Detweiler, 2014)
Secured consolidation loans are loans collateralized using property (usually houses) and have relatively low interest rates but if you miss a payment you might end up losing your home.
Unsecured consolidation loans have higher interest rates charged against them but the lender cannot make a claim on your home in case you default in you repayment.
Debt consolidation loans have various strengths and limitations.
Advantages of Personal Debt Consolidation Loans
- Managing debts is easier and more straightforward since all your loans are in a single pool and you only have one interest and one payment to make each month. You would know exactly what you owe and when your loan will be paid off.
- Closing down other credit cards and loan accounts can be an indication to lenders of your good financial management and increase your credit worthiness.
- Potential reduction in Interest rates and payments.
- Fixed payment for the loan term, usually 2-5years.
- Avoids minimum payment trap associated with other loans that keep you indebted for many years.
However, monthly repayment may be lower but the loan term is extended. Hence you are likely to pay more interest at the end of it all.
Before taking up a consolidation loan you should consider how big a loan you will need to offset the other loans, the costs and penalties of early and late repayments and the interest rate, which depends on the level of borrowing. Generally, the higher the level of amount you borrow, the lower the interest rate. You should only take up a personal debt consolidation loan if will end up paying less interest rates than what you would have paid with the multiple loans.