Getting personal loans, among others is not easier than ever. Lenders have lowered the requirements for most types of loans and they have reduced the restrictions on what can be done with the money. However, the interest rates have not changed, which means that, while it is easier to get a loan, the impact that it will have on an individual’s monthly budget is still as large as ever. This has led to situations where borrowers have taken out several loans, some with variable interest rates, only to discover that their debt has become too expensive to reliably support out of their monthly income. In some cases, it is possible to convince the lender to refinance a loan, however, this process has certain requirements that not all borrowers can meet.
Luckily, there is always the option of consolidating the debt and retaking control of one’s finances. Most lenders offer this option and the application and evaluation process usually takes under one month. Here is what you need to know:
What Is Debt Consolidation?
Debt consolidation refers to the process through which an individual can take all of his outstanding debt, regardless of form (it can come from maxed credit cards, personal loans, payday loans, and anything in between), and consolidate it in a single form of debt that has one interest rate and one monthly repayment date. For all intents and purposes, debt consolidation is done through a relatively large, secured personal loan. It usually comes with a term of at least 5 years and has a fixed interest rate. This having been said, it is important to keep in mind that some lenders may place restrictions with what can be done with the money. For example, depending on an individual’s credit rating, a bank may restrict the usage of a debt consolidation loan to repaying money that has been loaned by the bank itself. However, these are isolated cases.
Applying for a debt consolidation loan is easy. The borrower must go to the bank and ask to have his debt consolidated. He will be made an offer by the bank’s representatives and then discuss what property will be used as collateral. In most cases, lenders request that the loan be secured against the borrower’s home. This will give him access to a large debt consolidation loan that will have to be repaid just like any other loan.
Why Get a Debt Consolidation Loan?
Having multiple forms of debt is not only a financial nightmare but a scheduling one. Each loan has a different interest rate, a different value, and a different monthly repayment date. Keeping up with several forms of debt is difficult and can also be extremely expensive, particularly if you have any variable interest rate loans. A debt consolidation loan helps simplify things by enabling individuals to take out a single, secured loan that is large enough to cover most if not all other forms of debt. This leaves borrowers with a single affordable loan to worry about.
How to Use It?
As the name implies, these loans must be used to consolidate one’s debt. In other words, the more forms of debt one can repay using the money from it, the better. Start by repaying the smallest loans that have the highest interest rates. This should include credit cards and payday loans. After that move to larger ones. However, it is important to keep in mind that some loans may have early repayment fees that need to be repaid. Furthermore, it is a good practice to first try to refinance as many loans as possible. This will allow borrowers to get the lowest possible interest rates before consolidating the debt.