Are you struggling to stay organized with payments to be made on different due dates? It can indeed be a challenge, and the sad part is that if you fail to make payments on time, your outstanding balance will continue to rise due to accruing interest. A debt consolidation loan is a set of money that you borrow to pay off your outstanding debts.
Now do away with your worries because debt consolidation loans can prevent you from adding up your outstanding balance. For instance, if you have a credit card balance worth €1,000, a bad credit loan worth €1,000 and business loans in Ireland of €1,500. You will take out a new loan amounting to £3,500 to clear all your existing dues.
Now you do not have to worry about missing the due date of each loan as you will be left with only one large loan worth £3.500. You will pay down the new loan in fixed monthly payments. When you have outstanding individual debt, the interest rate is accrued daily basis.
However, when you merge them into one large loan, you can immediately clear the balance and prevent from paying interest. A new loan will require fixed monthly instalments, so you can easily manage it.
What are the Types of Debt Consolidation Loans?
There are several types of debt consolidation loans:
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Personal Loans
Personal loans are also a type of debt consolidation loan. You take out a personal loan to merge your outstanding debts. As consolidation loans usually do not require collateral, you can use personal loans to pay off all of your debts.
However, a good credit rating is emphasized to secure an affordable deal. If your credit report is not impressive, you will likely end up paying a higher interest rate. When you start struggling to make payments for your debts separately, you should immediately seek to consolidate the debt.
Since you will have a good credit rating, you can avail of attractive interest rates. You do not have many options in case of a poor credit score. Not all lenders offer consolidation loans to bad credit rating people.
Do the research before applying for these loans to avoid getting your application rejected by the lender because they do not entertain applications with a bad credit rating.
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Secured Loans
Personal loans may not always be a feasible option to consolidate your existing loans. There are two reasons for it: you do not have a good credit score, and the lender does not entertain people with a poor credit score. You borrow a large sum that is not possible to lend to a lender without security.
As collateral whittles down the risk on the part of the lender, you can avail yourself of affordable interest rates. You should do research to know which lender offers secured consolidation loans.
There could be some other formalities as well. You should get to know about them in advance. Having known everything will help you avoid unnecessary delays. Further, you can prevent losing your credit score by applying to the wrong lender.
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Credit Cards
If you have an outstanding balance on multiple credit cards, you can merge all your payments into a new credit card. It can be a great idea to have a new credit card, especially if you can get it at affordable interest rates.
However, this facility is generally available if you have a good credit score. Some credit cards have a feature of 0% balance transfer. If your existing credit card allows for it, use it for whittling down your financial burden.
Using a balance transfer credit card, you can repay outstanding payments in monthly instalments without any interest payments within an interest-free period. If you fail to clear all your dues within that period, you will have to pay off the balance at a very high-interest rate.
Balance transfer credit cards require a lot of conditions to meet. Having a stellar credit score is one of them. Check if you meet all conditions before availing of the balance transfer feature. Otherwise, you will end up hitting your credit score.
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Home Equity Loans
Home equity loans are also a part of consolidation loans. These are a type of secured loans because the money you borrow will be secured against the equity of your house. It is a difference between your mortgage and the market value of your home.
You can secure a loan at a lower interest rate as it will be treated as collateral. By getting money at competitive interest rates, you can save a lot of money.
You can use these loans if the consolidation amount is big and your lender is not comfortable approving it without security or if they sign off on they do it at a high-interest rate. Using your home equity against a consolidating loan, you can easily take advantage of affordable interest rates.
What to consider before opting for Debt Consolidation Loans?
Although debt consolidation loans come with several benefits, they have certain drawbacks too. You will have to mull over various factors to ensure you do not fall into a debt spiral.
- Before you put in the application for consolidation loans, you should scrutinize how much you owe and the current interest rate you owe.
- Even though you think you are financially strong enough to pay off your debt, you should have a backup plan if you lose your current income source.
- A consolidating loan is a long-term commitment, so you must ensure you can afford the payments despite a financial emergency. A missed payment can increase a lot of payments.
- The APR of the consolidation loan can be very high. You should compare these rates before reaching a decision. Ask for other fees as well as it will also affect the cost of your debt. At the time of applying for these loans, you should carefully monitor if it suits your financial condition.
- When you merge your existing debt, it may mean that you will likely be paying more interest than the original term. For instance, loans with bad credit in Ireland can cost you less money compared to a consolidating loan that includes these loans plus credit card bills. This is because the term is extended over a period of time.
Should I Merge Existing Loans?
A consolidating loan can be affordable and expensive, depending on the amount you borrow and the interest you pay off. If you cannot be on top of your payments, merging your existing loans is suggested. This can stop you from being tied up with a debt circle.
However, you should consider if you can manage these payments. The duration of these loans will be lengthy, so you must be sure about your repaying capacity.
Final Words
Consolidating your outstanding debts can be intimidating, but they are more manageable when you are unable to stay organized with multiple payments on different due dates.
However, it is not that easy. You will have to look at your financial strength and whether they actually help you save money on interest payments.
Consult an advisor if you cannot land a decision or be discombobulated about it. Their advice can help you make a better decision.
