Thousands of consumers are overloaded with debt. If you are one of them, loan consolidation could be worth researching. One of the easiest ways to relieve the stress of high payments is obtaining a personal loan to consolidate all the payments into one manageable monthly payment. However, you first want to take the time to research all the options as well as different lenders.
Purpose of Loan Consolidation
Before you begin researching the best loan consolidation services, it is essential to understand what it can do for you. The most important thing to know is consolidating your debts does not eliminate them. Instead, it consolidates multiple monthly payments into a single payment. Not only does this have the potential to lower your monthly outlay of cash, but it could also help you qualify for a lower interest rate.
What Are the Benefits of a Consolidation Loan?
Debt consolidation can help you manage your finances more efficiently. You accomplish this because you only have one monthly payment. There are five major benefits you will see when taking out a consolidation loan.
- Instead of several monthly payments, you make one payment that covers all your loans. This makes it easier to manage your finances.
- Many times, people consolidate debt because of high interest credit cards. A consolidation loan is likely to carry a lower interest rate than credit cards. While the interest rate you pay on a consolidation loan depends on your credit score, it will still be lower than most credit cards.
- A consolidation loan can increase your credit score. This happens because when you have only one monthly payment, your credit utilization is lower. This is a crucial factor in the credit scoring model.
- When you consolidate all those payments into one manageable payment, you will discover you experience less stress when it’s time to pay the bills. It can be difficult to remember when all the bills are due and how much the payment is. A consolidation loan eliminates those problems.
- It is quite common to find you can pay debt off faster with a consolidation loan. This is especially true of credit card debt because of the interest rates and the way they are structured. Many people tend to make only the minimum payment on credit cards, and this can take many years to eliminate even if you don’t charge anything else.
What Is Needed for a Consolidation Loan?
While qualifications vary among lenders, there are four major qualifications lenders consider before approving an applicant for a consolidation loan.
- The most important qualification lenders seek is proof of income. Lenders need to be certain you have the income necessary to make the monthly payments.
- When you apply for a consolidation loan, the lender will obtain a copy of your credit report and verify your credit history.
- Lenders assess your financial stability. They need to determine whether you are a financial risk or a good loan candidate.
- One of the most important factors for a consolidation loan is sufficient collateral to secure the loan. Real estate is the preferred form of collateral, but sometimes the lender will accept other assets.
Do Consolidation Loans Hurt Your Credit Score?
When you apply for a consolidation loan, there are a couple of things that could help or hinder your credit score. Some of the short-term effects that might lower your credit score when you seek a consolidation loan include the following:
- A hard inquiry on your credit report will lower your score a few points.
- The appearance of a new credit account will temporarily lower your credit score. Lenders see this as a risk factor.
- You may see a dip in your credit score for a while due to the fact the new account will lower the average age of your accounts.
Fortunately, there are positive aspects as well such as the fact a consolidation loan lowers your credit utilization factor and can provide an improved history of on time payments. Over time these two factors can increase your credit score.
How Does a Consolidation Loan Work?
A consolidation loan can help you reduce or eliminate the stress related to making several monthly payments and keeping track of due dates. With only one payment instead of several, the bill paying process is more convenient. Instead of several payments with possibly different due dates, you make one fixed monthly payment for the entire term of the loan. In many cases you will pay a lower interest rate, and the single monthly payment will probably be lower than what you currently pay.
Change in Repayment Terms
When you seek consolidation loan help in the USA, there is a possibility it will change the original repayment terms. This will make the payments easier to manage. Some of the items you may be able to change include the following:
- Switch from a variable rate to a fixed rate of interest.
- Consolidating debt could allow you to change the repayment term. This could mean a shorter period to pay off the debt quicker but with higher payments or a longer repayment term with a higher overall loan at the end.
- Remember, a debt consolidation loan is a personal loan, not a revolving line of credit like a credit card. However, you could also use a line of credit to consolidate your debt and still have the flexibility of a credit card.
Other Options to Consolidate Debt
While seeking help with a debt consolidation loan, it’s important to keep in mind there are other ways to consolidate and eliminate debt. Some of the possibilities include:
- Balance transfer credit cards
- Debt management programs
- Home equity loan
- Home equity line of credit
One important thing to know is debt consolidation is not free of fees. There are usually transfer fees connected to credit cards if you do a balance transfer and closing costs associated with home equity loans and lines of credit. The status of your credit will have a huge bearing on the consolidation options that are open to you. Credit Yogi loan consolidation services can help you choose the option that is right for you. We can also help you determine if debt consolidation is the best option for you based on your individual finances.
Seek Professional Advice Before Consolidating
If you need help with a debt consolidation loan, Credit Yogi is there for you. While consolidating is sometimes a good option for lowering payments, if your balances are low, it may be best to just develop a budget that will allow you to pay those small balances in full as quickly as possible. Always weigh the options before deciding what you need to do. Most importantly, conduct research before choosing a lender or consolidation option.