Loan consolidation means rolling all your multiple debts with different interest rates, repayments amounts, and due dates into a single payment. It is an option you take when you have several high-interest debts. It helps you to combine them into one lower-interest payment and reorganize the repayment duration and amount, thus reducing your total debt.
You can apply for a personal loan and use it to consolidate all your debt, thus saving you the extra money you pay on interest or the extra work of tracking the multiple loans you have. It is also a wise step when paying off debt or working on getting out of debt.
Although loan consolidation is a good idea, you need first to figure out if it is the best option. In this article, you’ll learn how the consolidation of loans work, when it is a good idea and when it is a bad option.
How Does Consolidation Of Loan Works?
Consolidation of loan entails bringing all your debt or bills together into one loan with a single monthly repayment. You may have several loans from different lenders. For instance, you may have overdraft balances, credit card debts, cash advances, payday loans, a title loan, a pawn shop loan, or a personal loan.
Each of these loans has its own repayment terms and interest rate. Some of these loans are extremely expensive, while others are reasonably priced. Further, the repayment amount and due date are different, thus making it hard to track each of them. Therefore, you need to take a new, larger loan and use that money to pay off these smaller ones. In essence, you’re bringing them together or consolidating them.
You can access the debt consolidation loan from your bank, finance companies, or credit unions. More so, there are several debt repayment programs for individuals that are experiencing challenges paying off their debts. Loan consolidation makes your life easier, for it simplifies the repayment of your debt. First, you only have one repayment to make at the end of the month.
Thus, you don’t need to panic every time you receive a phone call from an unknown person, thinking that you have failed to pay one or the other. It gives you an opportunity to get a bigger loan at a lower interest. For instance, a payday loan has an interest rate of 400% APR while a personal loan as a lower one of 4-36% APR. Thus, having a low-interest rate saves you money.
On the other hand, people argue that a larger loan has a longer repayment duration. However, you can reduce that period by using the extra cash you have saved from the multiple loans you had before to increase your current loan repayment. That means you will keep your monthly repayment pretty much the same as it was before.
Why Consolidating Your Loan Is A Nice Idea?
- Loan consolidation is beneficial, particularly when you get a bigger loan with a lower interest rate and monthly payment. It makes it easier for you to afford the new monthly loan payment.
- It allows you to use the funds you’re saving on the interest rate to reduce the cost and duration of the new loan; thus, you will complete paying it in full sooner. You can also use the extra amount to settle your emergencies instead of getting another online loan.
- Debt consolidation alleviates financial stress, especially when struggling to keep up with the loan repayment. It helps you to avoid falling behind on your payment, thus damaging your credit score.
- Debt consolidation enables you to access the debt management plan that is provided by various debt management organizations. These companies are able to secure lower monthly payments from your lenders. The option helps you to make a single consolidated payment to the firm, and they use it to settle your debt with your creditors.
- It’s a good plan that prevents you from running into debt again. It is a light at the end of the tunnel since a three-year term loan will end in the three years if you make your payments on time. On the other hand, credit card loans or advance may take months if not years before they are paid off entirely. Therefore, they accrue more interest than their principal amount.
Why You Need To Be Careful
You could end up paying more since the repayment terms of a personal loan are longer, although the interest rate is lower.
Consolidation of loans is only accessible by individuals with a good credit score and if you have collateral for a personal loan. You can only qualify for an unsecured loan with a decent interest from a bank or credit union if you have a high credit score.
Debt consolidation is only effective if you have a plan that will prevent you from getting back to debt again. It doesn’t address your overspending habit that created multiple debts in the first place. Thus, it is not an ultimate solution when you’re overwhelmed with debt and will not benefit from reduced payments if there is no hope of making the reduced payments.
The Bottom Line
It is really a hassle to track or make multiple payments to different lenders. Having debts with a high-interest rate is also expensive; thus, taking a single loan to consolidate your debt is a wise idea. You can take a personal loan with a lower interest rate and a more extended repayment period and use the amount to settle your smaller debts.
However, consolidation of loans does not address the excessive spending habits that plunged you into debts in the first place. More so, you can only access a bank loan if you have a good score. Therefore, if you took multiple loans because your score was weak, then debt consolidation will remain unachievable for you.
However, you can seek debt management assistance since these professionals are able to negotiate with the creditor. Thus, you can make a single payment to the debt management company, which will pay the lenders on your behalf. If you are in dire need of instant cash loan when in Singapore, check online to look for legit lenders that can provide you the amount you need!