A debt consolidation loan is a form of refinancing that allows the borrower to get rid of other debt sources. This can be done by securing a loan from only one lender which will essentially be used to pay off other outstanding debt.

Instead of paying monthly amortizations to many different lenders, the borrower will just be paying off one loan. Ideally, the new loan has lower interest rates and more flexible payment options.

Advantages Of Debt Consolidation Loans

Here are some of the reasons why you may want to get a debt consolidation loan:

  • Easier Monthly Payments. It is easy to get confused with the monthly payments when dealing with multiple creditors. By consolidating debt, the borrower can focus on paying just one lender every month.
  • Lower Interest Rates and Expenses. Putting all debt into one basket can save the borrower a lot of money. For example, combining balances from three separate credit cards can save money on interest charges, penalties, and membership fees.
  • Can Improve Credit Score. It is possible for banks to view debt consolidating actions favorably. In some cases, borrowers who consolidated their debt saw a noticeable increase in their credit scores.

Disadvantages Of Debt Consolidation Loans

Of course, there are some disadvantages as well. Here are they:

  • Can Lead To Even More Debt. If the borrower isn’t careful, consolidating debt can lead to even more debt. For example, it is tempting to use credit cards that have just been paid off in full. A borrower who lacks in discipline will easily fall into this trap.
  • Potential Loss Of Assets. Collateral assets may be required in cases of huge debt consolidation loans. In these situations, borrowers risk losing their house, insurance, car or other assets in the event of loan default.

Who Should Avail of Debt Consolidation Loans?

It is advisable for individuals with high amounts of consumer debt (such as outstanding balances on credit cards) to avail of debt consolidation loans. This will concentrate all loans in one big balance that can be paid off in monthly installments with better interest rates.

What To Consider When Taking A Debt Consolidation Loan

The most important consideration when taking this kind of loan is the interest rate. Ideally, the interest rate should be much lower to what you’d pay if you paid each debt separately. If you have a very small disposable monthly income for loan repayments, look for longer payment terms ranging from 36 to 60 months.

Private Investor Loans

Private Investor Loans

Some people are willing to put up their own money to help someone looking for a loan. In many cases, these can be your close friends, associates and family members. If dealing with investors outside your inner circle, ask to see valid identification and try to contact references that can verify the investor’s legitimacy. ...
Debt Consolidation Loans

Debt Consolidation Loans

One of the most practical options available, a consolidation loan is where you can take care of a collection of smaller debts by combining them into one. The loan is taken over a more extended period, giving you some breathing room to manage your money and your assets while you pay off the loan at a fixed interest rate. ...
Co-Signer

Co-Signer

Some creditors will accept a co-signer with good credit to serve as a guarantor for a person who has a low credit score. The co-signer is essentially agreeing to reimburse the amount owed if the loan applicant fails to pay their debt. ...
Car Title Loans

Car Title Loans

Similar to the home equity loan, you can use your car to secure your loan and use the vehicle title as collateral. The amount you can borrow will depend on your equity in the car, as well as the market value of the property. ...
Credit Unions

Credit Unions

A credit union is a financial cooperative that is run by its own members. There are different types of credit unions to suit a borrower’s needs, whether it be corporate or personal. The public tend to trust credit unions more than they trust the banks, and in many instances, interest rates aren’t as high. ...
Home Equity Loans

Home Equity Loans

This enables you to use your home as security for your loan. The loan amount you’re eligible for depends on the equity you have on the property. However, a major downside is that you stand a chance of losing the property if you don’t go through with the loan payments. ...
Peer To Peer Lending

Peer To Peer Lending

Also referred to as “crowdlending” or “P2P lending”, this option is where creditors are connected with borrowers via an online service. The peer-to-peer lending company collects a fee for their services, which includes assessing the credit of the borrower. In most cases, collateral is not required in P2P platforms. ...
Payday Loans

Payday Loans

These are usually quick loans for small amounts of money that are meant for a short timeframe (normally for a few months). They often come with high interest rates. Loan repayments will be taken from the borrower’s monthly salary. You can use this option for emergencies and urgent cash needs. ...
Micro Loans

Micro Loans

Much like payday loans, a micro loan or “mini loan” is for a small sum of money for a short period of time. Also known as “emergency loans”, they will also come with relatively higher interest rates. ...
Cash Advance

Cash Advance

You can also acquire a cash advance from your credit card. The amount of the loan depends on your credit limit. Unlike a payday loan which doesn’t involve a credit check, a credit card cash advance is linked to your credit card, meaning you would need to have passed a credit check in the past to obtain one. ...
Pension Loans

Pension Loans

In this case your pension acts as an asset much like a house or car. The loan is taken out according to the value of your pension. The downside is that this often involves a long-term payment plan against many more of your pension payments to come. Some companies require that the borrower must buy a life insurance policy that names the company as the beneficiary. ...