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Keep These Factors in Mind Before Taking a Debt Consolidation Loan

Debt consolidation loans can be a great stepping stone to rebuilding your finances, but you need to use caution when applying for one. 

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What is a Debt Consolidation Loan?

Debt can create a messy situation and could even lead you to bankruptcy. A debt consolidation loan may help you prevent this and rebuild your credit.

Debt consolidation simply means moving all your debts into one place. This puts a stop to having to pay multiple statements every month and performing a balancing act as you try to pay off at least one account. What’s more, this can also reduce your interest rate and help you pay off the debt even quicker.

This is similar to refinancing a loan, as the new lender pays off the old loan and you now the new lender. Unlike refinancing, though, a debt consolidation loan pays off multiple lenders, whereas refinancing generally only pays off one loan.

There are various debt consolidation agencies, and their focus is to provide you with relief from your high-interest debt. That said, circumstances differ between borrowers, so it’s important to find a loan that matches your financial needs.

Related: 5 simple steps to get rid of debt.

Is Debt Consolidation For You?

A debt consolidation loan is one of the more popular bedt-management options, as they generally offer favorable terms and are more flexible with their payment options.

Other lenders may offer similar personal loans or unsecured loans, but these sometimes come with higher interest rate since they are not tied to reliving your debt.

A key thing to remember when taking out a debt consolidation loan is that it does not reduce your debts. You will still owe the amount, but your interest rate and payment terms may have adjusted.

A debt consolidation loan may be perfect for you if:

  • You can afford to keep up payments until full loan repayment.
  • You are using it an opportunity to cut spending and get back on your feet.
  • The loan will help you clear all the debts you have.
  • Your loan payment is lower than all your minimum credit card payments combined.

How to Consolidate Debt

If you are struggling to manage your debts, you need to talk to your lenders and write down all your loan and credit balances. Pulling your credit report from the reporting agencies can be a good way to get all these balances in one place. You can also use this report to verify there are no red flags or accounts that you don’t recognize.

With all this information in hand, have a conversation with a credit counselor. They can help guide you through all your debts and determine if a debt consolidation loan is right for you. They may also recommend other avenues besides taking a loan.

If the credit counselor determines a debt consolidation loan is right for you, you can find multiple lenders online. Bank also offer debt consolidation loans.

A Secured Loan Vs. Unsecured Loan

A secured debt consolidation loan has a lower interest rate because there is collateral securing it. People often use the equity in their home to get a second mortgage and pay off their debts. While this will get you a strong interest rate and spread the payment over as many as 30 years, this is risky, as you will have to put your home up as collateral.

Unsecured loans may be viewed as a favorable option since there is no risk of losing a property. You can compare dozens lenders offering debt consolidation loans here at Financer.com.

Avoiding Consolidation Traps

Ensure the decision to consolidate a loan is reasonable. The rates need to be a much lower than the total amount of debt you are consolidating. Also keep an eye out for any early repayment penalties.

Check the loan term. Even if the interest rates are low, a longer term means more fees and accrued interest in the long run. Always read the terms carefully and verify that your lender is licensed.

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