How a debt consolidation loan works | allthelenders
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How a debt consolidation loan works

For those who are unaware of what debt consolidation is, it is basically when someone takes all of their debts which are outstanding and combines them into one lump sum which is a much more manageable loan. The aim is to make the debt easier to deal with as just one single problem rather than loads of little ones which can overwhelm a person.

The process of debt consolidation assures lower interest rates overall to the amount of debt a person as built up as well as offering a convenient way to pay it all off under one sort of umbrella loan.

For those with lots of credit card and payday loans debt hanging over their head, the idea of debt consolidation seems extremely attractive to many people and it can be hugely positive, particular in the case of having a number of creditors to deal with. It means less phone calls and letters from debtors and being able to sort them in one fine swoop.

However, it is not a get out clause and you will still need to make sure that, like with any loan, you have the capacity to pay back the debt in full whenever the payments may be due.

Please take the time to consider that when you are committing to taking out another loan, you are essentially paying back a larger amount over a longer period of time. Be sure that you that you understand when the repayments finish and that you are content with the length of the new loan in terms of how long you have to pay it off.

Securing Collateral

A debt consolidation lending company will often opt to use a secured loan against your larger ones associated with a personal asset such as a property or an automobile. The interest you are paying on an unsecured loan is likely to be a lot higher in the majority of cases. Having a secure loan in place means that your secured collateral may be at risk if you fail to make the repayments.

Compare Live Rates For Short Term Loans Now

(Loans from 3 – 12 months). Representative 49.7% APR.


What are the benefits of debt consolidation for you?

We have previously discussed at that debt consolidation allows for a convenient way to pay off all your smaller debts under one larger debt. But what other benefits can consolidating your debts offer you?

Improve your credit rating

If you do not accumulate any further debt when seeking debt consolidation and you become able to pay it off, you will see an improvement in your credit rating and your bank will look at this as a huge positive.

To be aware, it is always good to check up on the reports which display your credit score before you take out any loans at all, including deb consolidation.

Reduction in Monthly Payments

You will essentially be spreading out the term of the debt when you take out debt consolidation. As a result, you be able to reduce the monthly repayments to a level that is a lot more comfortable and manageable for you

In the majority of cases, people will be paying what is known as the minimum payment which is allowed on existing debt. Typically, this will mean that the interest rate of the loan is covered whilst the total amount is left of what you actually own is unchanged.

Reduce the interest you pay

If you have debts on a credit card that have a higher interest rate, it makes that you will usually pay back less interest on the debt you have accumulated with a loan.

How do I get debt consolidation?

There are plenty on debt consolidation lenders online which offer different things options.

When looking to take out debt consolidation, a lender will assess how much outstanding debt you have at present along with your credit risk to determine whether you are eligible for a debt consolidation loan at all.

Having a bad credit history or any previous large debts may cause a lender to only offer you a secured loan. This means, as discussed, that you have collateral placed against your loan. In the event that you cannot pay it back, the collateral will be used as consolation. Thus, if you do have a bad credit history and/or large debts, be sure that you will be able to cope with the loan to avoid losing your property or car, for example.

If your outstanding debt is low and/or your credit rating is good, you are very much at an advantage when it comes to debt consolidation loans. A personal loan is far easier to get and you can find better deals in this area. You should find little problem reducing your debt if you have low outstanding debt and a good credit rating.

Many personal loans can be used to consolidate your debts. The lender will look at factors such as:

  • Your credit history
  • The overall amount you want to borrow from them
  • The length of time you will need to repay the debt

Compare Live Rates For Short Term Loans Now

(Loans from 3 – 12 months). Representative 49.7% APR.


Understanding the fees involved

Using a debt consolidation loan comes with fees, because it is still a loan. So in addition to your current outstanding debts, you can expect another fee on top.

There are also charities that can help with debt consolidation such as StepChange, which do not charge any fees for managing your debt. This is also a viable option for someone looking for help consolidating their debts and there is the option of going into debt management and have a professional contact every creditor you owe and take care of the process for you.