In the simplest of terms, debt consolidation is the process of converting multiple debt obligations into one single loan amount with benefits like lower interest rates, flexible payment period etc.
It is a great alternative for borrowers who want to simplify their loan payment processor for people with a good credit score who could convert their existing loans to a debt consolidation loan at lower interest rates. It helps borrowers to pay off their loans in a faster manner and save money provided they maintain discipline in timely repayments.
Listed below are 7 key debt consolidation facts, which would help borrowers decide whether debt consolidation is the right choice for their financial objectives.
#1 Debt consolidation involves merging of multiple debts, not waving them
Debt consolidation involves getting a new debt by combining all the previous debts. This leads to single monthly debt payments and could even lead to a lower rate of interest, which could be more affordable for the borrower.
Though it makes the whole debt payment process easy and economical, still it does not lead to the waiver of the old debts or reduction in the overall debt obligation. Debt consolidation is NOT waiving off existing loans. In fact, it requires the borrower’s commitment to regular and disciplined payments, so that there are no defaults on the consolidated loan.
Additional Reading: The Pros And Cons Of Credit Card Debt Consolidation
#2 Borrowers can alter repayment structure
When opting for debt consolidation, one can restructure the existing repayment terms to manage the new combined debt in a manner beneficial to them. This could be through options like switching to a fixed rate or changing the repayment tenure, etc.
#3 Debt consolidation can be considered as a type of personal loan
Personal loans are the best alternative for borrowers looking at satisfying their immediate financial needs, including paying medical bills, college education etc. The main reason why people opt for personal loans is to have a single debt structure. So, one should ensure that opting for such debt consolidation would be more economical and the borrower has the capability to make regular timely repayments.
#4 Debt consolidation could have upfront fees
Opting for a debt consolidation entails upfront fees for the borrower, which tends to increase the overall cost of consolidation. Some lenders may charge nominal fees like processing fees for personal loans, while other lenders may require borrowers to have a good credit score. So, borrowers should compare various lender options before consolidating debt so as to choose the most favourable option. Also, borrowers should evaluate the fees of taking a debt consolidation loan to decide if the savings are worth it.
#5 Eligibility for debt consolidation loans are determined by credit score
People with a good credit score find more favour with lenders. The options under debt consolidation also favourably increase for borrowers with a good credit score. Those opting for debt consolidation have a better chance of qualifying for a lower interest rate or lower processing fees if they have a good credit score. Even low credit score borrowers can avail of debt consolidation loans but albeit with a higher rate of interest or some collateral etc.
#6 Debt consolidation entails good potential financial standing
As debt consolidation expects the borrowers to commit to a disciplined and timely repayment schedule, it could lead to borrowers gaining good financial standing. This could also lead to a higher credit score. Potential lenders favour borrowers with a consistent repayment history. So, going in for debt consolidation could, in fact, work in favour of borrowers over the long term, with higher chances of getting future loans at good terms.
#7. Debt consolidation may not be the only viable alternative
Though debt consolidation loans are hugely popular due to their simplicity and ease of operating, still it might not be the best option for all. One could work out better ways to go for more affordable options to refinance, like loan refinancing, etc. Borrowers with small loans could as well repay it through having a budgeted timeline, which could be more economical for them.
Additional Reading: Personal Loan for Debt Consolidation for People with Bad Credit
Debt consolidation could be beneficial for borrowers looking for a simplified and easier way of timely loan repayments. It’s a huge help to borrowers who have multiple loans and are struggling to make their payments on time. So, make sure to evaluate the pros and cons of debt consolidation loans, understand your current debts, and decide if it’s the right choice for you.