New York, NY (PRWEB) August 27, 2014
That is when a debt consolidation loan can come in handy. As the name suggests, this type of loan allows borrowers to consolidate all debts into the one loan, so there is only one payment each month. Streamlining your debt obligations in this way can take a lot of the hassle out of managing money.
Here, we explain exactly how this type of loan works, and why having one can help to get finances back on track…
How do debt consolidation loans work?
With a debt consolidation loan , simply move all borrowing, or a significant chunk of it, onto the one loan.
Then, close down the various credit card and loan arrangements, using a consolidation loan to clear the debts. Rather than making lots of separate payments to different lenders every month, only make one payment.
With each loan, check whether there are any early repayment charges - and if so, factor them into calculations.
Most debt consolidation loans are unsecured, which means the lender can’t lay claim to the home if unable to keep up with repayments. That doesn’t mean borrowers can be casual about paying what is owed. The lender may still pursue courts for dues.
Be wary of loans that are obtained, as this means the debt is settled against the property (or other assets), so if struggling with payments, the home could be at risk.
Pros and Cons of Debt Consolidation Loans
The biggest advantage of a consolidation loan is that all debts are in one place, so there is only one interest rate to keep track of, and one payment to make every month.
That can make managing debts much more straightforward than having to think about making several payments every month.
It also means you can close down other credit card and loan accounts, which should improve credit ratings, as it will show lenders responsibility.
However, one disadvantage of consolidation loans is that borrowers may end up paying more interest than needed in own some of the loans.
Such balances may be moved to a balance transfer credit card offering a 0% introductory period on balance periods for several months.
Things to note when taking out a debt consolidation loan.
When consolidating debts, work out how big a loan is needed and check the interest rate, as rates are usually tiered depending on how much is being borrowed. As a general rule, lower rates are given to those who more borrow more, so it sometimes makes sense to borrow a bit more to pay a lower interest rate.
If a borrower thinks they may be able to pay off the debt consolidation loan early, they should check to see if there are any penalties for doing so. Remember that the longer the loan takes to pay off, the more interest there will be.
Finding the right debt consolidation loan.
There are lots of different loans to choose from if looking to consolidate debts, so always do plenty of research before applying for one to make sure to secure the best possible deal.
For more information please visit us at: http://www.moneyexpert.com