Are you wondering, “How do debt consolidation loans work?”
Debt consolidation loans can help you repay your loans conveniently and much faster by making one loan payment instead of having numerous loans. Unfortunately, when debt consolidation is not done right, you could lose more money and become much deeper in debt than before.
Before considering debt consolidation, ensure you research and find out what it is and how it works. Read on below to understand more about debt consolidation loans and how they work:
What Is a Debt Consolidation Loan?
Debt consolidation is a term that refers to the process of taking one colossal loan to help you pay off other smaller loans you may have. For instance, if you get approved for a credit card with a higher balance, you can use it to pay up your other credit card debts. This will transfer all your small loans to one big loan, helping you pay one loan instead of many.
The main idea behind debt consolidation loans is ensuring consumers pay one loan every month instead of many. It also helps you pay less interest and accelerates your debt repayment period.
When You Should Consider Debt Consolidation
Before considering debt consolidation, it’s essential to look at your finances and check out your loans. Unfortunately, a poorly executed debt consolidation strategy could leave you more in debt than before. Therefore, for your strategy to succeed, ensure you meet the following requirements:
- You can repay the consolidation loan within the next five years
- You have a good enough credit score to qualify for low-interest consolidation loans or 0% interest credit card
- The money you earn will consistently go towards covering your loan repayment
- You should dedicate up to 50% of your monthly income towards covering your debt, including mortgage and car repayments
There are many instances where debt consolidation is a good idea. For example, if you have three loans with percentage interest rates of 18%, 21%, and 24% consecutively, getting a debt consolidation loan with a 7% interest rate will make more sense. This means that you get to combine all your loans into one low-interest loan.
Debt consolidation has helped most individuals repay their loans much faster. For instance, repaying three different loans with high-interest rates means they may take you years to complete the repayment. This also means that your three loans will accumulate more interest the longer you take to repay them.
Understand Your Debt Consolidation Options
There are many options for debt consolidation today. Ensure you take full advantage of these consolidation options to help you repay your loan in full and on time, without ending up deeper in debt. Understanding your debt consolidation options is the first step to getting the right loan and creating a suitable debt consolidation strategy.
Below are the different options in the market for debt consolidation:
1. Low-Interest Credit Cards
Do you already have a low-interest rate card with a decent balance?
This could be the key to your loan consolidation strategy. You can unite all your loans into one card and work towards paying off the credit card loan. However, pay close attention to the repayment period and avoid piling on too much on the card.
If you pile on too much on one card, it could negatively impact your credit score.
However, this may not be a significant concern if you can repay the credit card balance within a short period of time. That’s because the credit score will improve as you reduce the credit card balance. But if you can’t repay the credit card balance within a short period, then it’s best to consider other debt consolidation options on this list.
2. Get a Personal Loan
Did you know that you can get a personal loan to help you consolidate your debt? However, personal loans often have fixed interest rates and repayment periods of between 3-7 years. A personal loan is not secure, which means you will need a good credit score to qualify.
You will need a credit score of 670 and above to qualify for a suitable personal loan to help you repay your debt. The higher your credit score, the higher your chances of qualifying for a low-interest personal loan.
However, ensure you apply for a personal loan with a lower interest rate than the percentage interest you are paying on your current loans. Keep in mind to consider the repayment period to avoid paying a higher interest over a long period of time.
Ensure you hire the best debt consolidation company to help you with your loans. Ensure you consider applying for a debt consolidation loan from Plenti. Plenti will help you start your debt consolidation process with low-rate personal loans to help you repay your loans sooner.
3. A Secured Loan
Secured loans are protected by properties and other equity. Examples of secured loans include equity line of credit and home equity loans. However, it’s advisable to avoid taking loans secured by paychecks, such as payday loans and car titles.
That’s because they often have unreasonably higher interest rates and predacious terms. Additionally, if you cannot repay the loan, you will risk losing your car or your loan. It’s also a bad idea to get a loan backed by your home to repay a loan that could be erased by filing for bankruptcy.
How Do Debt Consolidation Loans Work?
The main question on people’s minds is, “how do debt consolidation loans work?” Debt consolidation loans help consolidate all your debts into one large loan to make the repayment process easier and faster.
However, before settling for a debt consolidation loan, ensure you understand your situation and take time to research more about your lenders.
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