What Is a Debt Consolidation Loan?
A debt consolidation loan is intended as an option for managing debt. You’re not borrowing to buy new things, but to bring all your existing debts together.
Imagine that you have a credit card, two loans and a car finance agreement. Every month you’re making four different payments, trying to keep up with your debts. You’re dealing with four different creditors, with minimum payments and charges building up in all directions. You might apply for a debt consolidation loan to help you take control of your budget.
You’ll apply for a loan that allows you to pay off every other debt. You’ll then pay back your loans, take full ownership of your car and clear your credit card balance. Now, you’re just left to deal with your debt consolidation loan.
Benefits of Debt Consolidation Loans
If you’re struggling to manage several different debts, a debt consolidation loan might help.
You’ll only need to worry about one monthly payment, which makes your money easier to manage. You may find that your new monthly repayment is significantly lower than how much you were paying every month before your debt consolidation.
In some cases, debt consolidation may work out cheaper long-term. Calculate the current cost of interest on your debts, as well as any charges or late payment fees. See if debt consolidation could be more affordable when all other factors are weighed up.
With a debt consolidation loan, you’ll owe just one company. You’ll have one monthly repayment, and one debt-free date to keep in mind.
Drawbacks of Debt Consolidation Loans
To make use of a debt consolidation loan, you’ll need to get into more debt. It would be best if you borrowed enough to pay back your other debts, then you’ll have more interest added on top. You’ll be paying your debts back for longer. Only in rare cases will debt consolidation loans work out cheaper overall, so think carefully about all your current payments and the total cost of your debts.
Debt consolidation loans can also be bad news if you’re not great at managing your money. They’re only successful if you make sure that you don’t get into further debt. Once you’ve paid off your loans and your credit cards, ensure that they’re gone for good. You should cancel your accounts and cut up your cards to remove other borrowing options.
Debt Consolidation Loans Best of Intentions
Many people apply for debt consolidation loans with the best of intentions, but leave lines of credit open and quickly fall back into bad habits. If you borrow money to clear your credit card, then use your credit card again, you’ll end up with twice the debt and in a worse situation than before.
Remember that debt consolidation loans will leave you with just one debt-free date. Whilst your previous debts might have been higher at first, they’ll probably have dropped as you gradually repaid different creditors. Eventually, your payments will have been easier to manage.
Perhaps you’d have cleared one loan ahead of the other debts, bringing your monthly payments down. With a debt consolidation loan, your payments won’t go down as time goes on – whatever you agree to pay in the first place is the figure you’ll be paying until the end.
For some people, debt consolidation loans are exactly what’s needed to get in control of debt problems. For many, the risks and costs will outweigh the benefits.
Debt Consolidation Loan Approval Rates
Debt consolidation loans are relatively easy to get. Though they can be high value, they’re replacing other debts that you’ve already got. You’re clearing some debts in exchange for this new loan so that lenders will be a bit more lenient. Providers of these loans are expecting you to be able to manage your repayments because they know that you’ve already been making them elsewhere.
The challenge isn’t getting the loan but finding the loan that works for you. You’ll have to consider the loan term and the costs, making sure that it’ll save money. Obviously, there’s no point trying debt consolidation if it ends up a lot more expensive.
Before you apply for a debt consolidation loan, work out how much your debts already cost. See how much you’re paying in interest each month and be honest about any extra charges.
Are you always late making loan payments, or do you only make the minimum payment on your credit card balance?
Once you’ve worked out how much you’re being charged every month, you can see if debt consolidation’s cheaper. Keep in mind that other debts may have finished at different times. If one of your loans is due to be repaid within six months, would your remaining debts be easier to manage without choosing debt consolidation?