A Complete Guide on Debt Consolidation Loans

A Complete Guide on Debt Consolidation Loans

What is Debt Consolidation?

Debt consolidation is taking a loan to help you pay off all your existing loans. When you have loans from multiple lenders, credit cards, student loans, or medical debts, you may want to simplify your repayment plan. You take a loan, pay off the debts. You will be left with only one loan which you can pay under new terms.

Types of Debts to Consolidate

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Credit Cards give you loans which are spent on grocery stores, gas stations, or withdraw cash. Credit cards charge high interest of over 18% on the amount given. When you have several card loans, you can consolidate them for faster payment and reduced interest.

Student Loans: Nearly four million Americans have student loan debts. The interest charged ranges between 4.45% -7%. When you have loans from different lenders, you can consolidate them. For private student loans, the rates are higher.

Medical Bills: having high medical bills may result in termination of your income or a lien being put at your house. Consolidating the debts helps in easy repayment.

Who to Consolidate Your Debt With

There are many companies offering debt consolidation services. They include;

Credit Card Debt

Lending Club provides peer-to-peer lending. For someone with a low credit score, the lending rate is a bit high. You can use the calculator to check what amount you qualify for and the lending rate. On average, a credit rate of 8.06% is used.

You can also use the balance transfer credit card. These cads have zero interest on debts transferred from other credit cards. During the APR period, you can repay the loans without encountering increased interests.

Be careful when using the balance transfer credit cards. At times, you may end up paying higher interest on the loan as compared to the loans on old credit cards.

Student Loans

Refinancing is the best solution if you are struggling with student debt repayment. Earnest offers low-interest loans. Credible is also another company that gives reliable debt payment services.

Medical Debt

Peer-to-peer lenders have the most affordable medical bill payments. Lending Club is a good option. You can also obtain a loan from credit unions and not the normal banks whose interests are high.

What to Look Out for When Taking a Consolidation Loan

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  • Check Out for Terms on Loans

When taking a consolidated loan, you must be keen on the terms of the lender. Not always does taking the loan guarantee payment of lower interest. At times, it can be higher. The main concern is on reducing the interest accumulated by all loans monthly.

The consolidated debt interest ranges between 5%-36% based on your credit score. Higher credit score attracts lower interest and vice versa.

Be keen on lenders who promise low monthly repayment. You could pay low monthly amounts for the loan but a more extended period. Will you have saved anything? Absolutely no.

  • Consolidating Debts are Risky

Do you think consolidating debt is risky? Some lenders make outlandish promises of low-interest charges and the long repayment period. In most cases, you could be signing yourself into a debt trap. Don’t be too quick to jump to any offer before evaluating its viability.

  • Beware of Fees

Some lenders offer consolidation loans with hidden terms and charges. The fees charged may eat all your savings and make the loan too expensive.

  • Debt Settlement Scams

Beware of some debt settlement companies that are in business to scam innocent clients. Some may advise you to stop paying your debts and instead, send money directly to them to negotiate or pay off your debt. That is a red flag for a scammer. It will take your money and disappear, leaving you a bigger debt burden.

Also, ensure you do not give your credit card or bank information to consolidate loan companies that are suspicious. You may suffer from hacking and fraud.

  • Hurting Your Credit Score

When you consolidate your date and make prompt payment, your credit score will improve. All credit cards that had been defaulted are closed, and you are left with one. However, if you keep defaulting the new loan, your credit score worsens.

It is advisable to stay without taking any debt after consolidating current debts.

DIY Alternatives to Consolidate Debt

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  • Make More Money

If you are drowning in debt, you need to get additional sources of income. You can drive an Uber, blog, start a dropshipping business, Pet sit, complete paid surveys among many things. You can also get a part-time job in a bar or restaurant.

  • Minimize Your Expenses

It is useful to save on your spending. You can get the Mint free app to manage your bills.

Trim and Truebill help you in managing recurrent bills and subscriptions that cost you a lot of money. Billshark will negotiate the bills on the phone, internet, and cable bills.

  • Improve Your Credit Score

Credit Karma helps you in monitoring your credit score every time payment is made. Ensure you repay debts on time to improve your score and qualify for high consolidate debt.

Summary

Debt consolidation is a tool and not a solution to your debt problem. Learning proper financial practices will keep you out of debt.

Managing your credit card and medical debts can be solved by creating an emergency fund. While paying the consolidate debt, you must save some money for emergencies in your bank account. The money keeps you from going back to the financial trap of taking more debt.

Regardless of how much you earn, poor spending habits result in bad credit card debts. Spend within your income and save more.

Use the debt consolidation experience to turn over your financial situation and not make a mistake again.