Under a debt consolidation loan, all the debts of an individual are clubbed into one and repaid to the financial institution at a reduced rate. Instead of paying a variety of lenders, you can pay off all your debts to one lender. However, when applying for a debt consolidation loan you must be thorough with the process and what you’re getting out of it.
How do debt consolidation loans work?
Many people think taking out a debt consolidation loan is the same as filing for bankruptcy. However, it could not be farther from the truth. There are significant differences between the two. While bankruptcy is helpful in dealing with overwhelming debt, a debt consolidation loan a) allows you to consolidate the loans and pay off most of them at once and b) pay off the remaining at a reduced interest rate over a period of time.
The benefits of debt consolidation loans
- Consolidating your debts into a single loan helps you save time and energy.
- You eliminate paying off debts at high-interest rates.
- You only have to pay off debts to one instead of multiple lenders.
- You avoid being stuck with expensive loans that drain your assets.
Things to consider when taking out a debt consolidation loan
With debt consolidation loans having many benefits, here’s what you need to consider before applying for one:
- Be thorough with your finances: Before you apply for a debt consolidation loan, check whether your finances are in order to apply and if you qualify for one.
- Scour through the available options: Researching the debt consolidation loan options in the market will help you decide on the one that suits you the most depending on your financial situation.
- Choose the right mix of components in the interest rate: When applying for a debt consolidation loan, select the right mix of the fixed rate and the variable rate. Fixed rates have higher monthly payments but lower total costs. Variable rates have lower monthly payments but higher total costs.
- Know the loan fees and costs beforehand: The loan fees might vary from bank to bank. Some banks might even charge an additional fee when you apply for a debt consolidation loan.
Get pre-approved: When you get pre-approved for a debt consolidation loan, the interest rate levied by the financial institution is usually lower.
If you have a significant debt to pay off, availing of a debt consolidation loan is a good idea. Not only do you pay off the debt at reduced interest rates but also pay all of it to one lender. You save time, money, and energy and eliminate financial problems in the future.
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