Defaulting on loans might have serious consequences – you could lose out on eligibility for future loans, your credit score will plummet, and you can even lose your car or house. Loan consolidation is a method to better manage your financial troubles making monthly payments easier.
But loan consolidation isn't as simple because it seems. Let's review exactly what it is – and if it's best for you.
What is debt consolidation?
Loan consolidation (also known as debt consolidation reduction) is taking out one big loan to repay many smaller loans.
Here's the way it works: you (the borrower) remove one big loan from the new lender equal to the amount of all the debt you need to consolidate. This can be achieved in many different ways, including home equity loans, credit cards balance transfer, or simply a large personal loan. By doing this, all you have to be worried about is paying down one loan amount rather than monitoring multiple debts.
How do I determine if debt consolidation is right for me?
It all comes down to your own personal debt situation. Think about these questions:
o Do I have a lot of loans to keep tabs on?
o Are my monthly obligations too much that i can handle?
o Would be the rates of interest I’m paying excessive?
o Is my debt overwhelming even when I keep a tight budget and close eye on my small finances?
o Shall we be held near to defaulting on my charge cards or student education loans?
If you answered yes to these questions, you may take advantage of consolidation.
What kinds of debt are you able to consolidate?
Loans are divided into two categories: secured and unsecured. You can consolidate both types, although not necessarily into a single loan all together.
“Secured” means a loan is backed by collateral that can be taken back if you don't pay – like a car that can be repossessed for an unpaid auto loan. Some forms of secured debt include auto and car title loans, mortgages, and home equity credit lines (HELOCs).
“Unsecured” means there's nothing a lender may take back should you default – for example, no-one can get rid of the knowledge you gained at school even if you fail to pay back your student loans. Forms of unsecured loans likewise incorporate credit card debt and medical bills.
Not all lenders will let you consolidate all types of loans together. For instance, student education loans have to be processed through certain programs; they cannot be lumped along with your credit card bills or mortgage. You will need to ask a lender directly the things they can sort out.
Pros & Cons
Debt consolidation loans get their advantages and disadvantages. Let's review some.
Pros:
o Easier management. It is a lot simpler, mentally and financially, to help keep track of one loan than many.
o Lower payment per month. You may not pay any less with time due to interest, but your monthly bills won’t be as high. This can help much if you’re struggling to afford basic necessities or else you wish to start storing savings.
o Helpful for high-interest loans. Private student loans and credit card debt often come with steep rates. Consolidating could bring them down.
o Avoid blows for your credit rating. When your monthly obligations are lower and easier to handle, you’re not as likely to miss a payment and damage your credit score.
o Can help build your credit score. Not every places will give consolidated loans to people with low credit, but some do and for lower rates of interest than you’re currently paying. If you’re experiencing poor credit, the best to improve it is by looking into making your monthly obligations on time – every time.
Cons:
o May not save much (if any) money in the long-term. Remember that lower payment per month we mentioned? Whether it's composed through higher interest rates, the best sum you have to pay might not be any less than should you didn't consolidate loans. This differs from bank to bank – some offer lower interest rates than what you're paying now.
o Interest rates could increase with time. If you're using a private lender, they could increase your interest rates with time, usually in relation to a financial index. (This isn't a problem with a fixed rate lender.)
o May lose certain benefits. Some original lenders offer forgiveness or deferment benefits. You might lose out on these should you consolidate.
o Longer payment life loan. Lower rates of interest and monthly payments both mean you will be paying down your consolidated loan a bit longer of your time.
In general, people choose consolidation because it lets them pay off their debts for a lower amount every month in a lower rate of interest. Although not every consolidation lender is identical – it's important to check their terms before applying.
Will debt consolidation hurt my credit?
Not necessarily. If you follow the loan terms, consolidation will in fact help your credit score. Your credit rating will only suffer should you fall deeper into debt and miss payments.
You ought to know that consolidating your loans isn't like waving a magic wand. You've still got to create regular payments, stay on surface of your money, and yourself from accumulating more debt. But consolidation can provide more space and take some from the daily burden off shoulders.
So, what in the event you do?
You may be wondering at the end of this, “Well, is it smart to consolidate my debt or otherwise?”
There's truly no one-size-fits-all answer. It all comes down to your individual financial circumstances. If you've decided that you should consolidate, then you've multiple options for doing so, including contacting a private lender or perhaps using your home equity.
If you are always unsure if loan consolidation is right for you, it never hurts to inquire about anyone to assist you to decipher it. Our consolidation experts will help you understand your individual situation and evaluate which course of action is best for your family. Contact us today at (813) 328-3632 to speak with a specialist.