Debt consolidation loan – How it helps to pay bills and boost credit

Most people in American carry multiple credit cards with sky-high balances with high-interest rates. For these people, a debt consolidation loan can be a helpful option. In debt consolidation, the multiple debts are merged into a single one. So, it is easy for you to make payments.

Consolidating all your debts into a single and affordable monthly payment may seem to be a cost-effective option to eliminate your debts. In this article, we will discuss what is debt consolidation and how it helps to repay credit card debts.

What is a debt consolidation loan?

Debt consolidation is the process that lowers the interest rate on your unsecured debt. To repay multiple debts and loans, you can take out a consolidation loan. You can repay all your debts with the new loan. However, you need to repay the new loan to get out of the debt completely. Make sure you get the consolidation loan with a lower interest rate. Otherwise, you may end up paying more.

Different types of debt consolidation loans

Debt consolidation loans come in many forms that you can consider to consolidate credit card debts. Unsecured personal loans and home equity loans are a few different types of consolidation loans.

Note: You can also consolidate your credit card debts by enrolling in a debt consolidation program. It is one of the most popular ways as your consolidation is handled by people who are experienced in hard negotiating. When they negotiate for you, there are better chances of you getting lower rates.

Debt consolidation: Pros and cons involved with it

There are various ways in which you can consolidate your debts. In consolidation, all of the several credit cards get grouped into a single debt. So, through debt consolidation, paying off your multiple debts becomes easier. However, If you really want to get the most out of debt consolidation, you need to be aware of both the pros and cons, so that you don’t end up complicating things.

Pros of debt consolidation loan

  • It helps to repay debt sooner
  • Accumulating multiple debts can be overwhelming for a debtor. Debt consolidation loans can simplify the debt repayment process as it helps to merge all the existing debts. The debtor needs to repay only the new loan.

  • You can get a fixed repayment schedule
  • Using only a single loan is much easier than remembering the payment schedule of multiple debts. Once you take out a debt consolidation loan, you get a fixed date for making the monthly payment.

  • Consolidation loan helps to boost credit
  • Paying off multiple debts with a debt consolidation loan can help you to boost your credit score. Since you are paying off all the debts in full, it will help you to raise your credit score.

Cons of debt consolidation loan

  • It doesn’t solve financial problems entirely
  • Taking out a debt consolidation loan is not a permanent solution to a debtor’s financial problems. The debtor has to repay the consolidation loan to become completely debt-free. On the other hand, taking out a new loan can make the debtor more vulnerable to falling into debts again. Learning good financial habits and proper credit card management can be the permanent solution.

  • You may pay a higher interest rat
  • Taking out a debt consolidation loan with favorable terms and interest rates can be difficult. You may be offered a loan with a high-interest rate, especially if you have a bad credit score. In this case, taking out a consolidation loan can be a costly option.

Is it a good idea to get a debt consolidation loan?

Taking out a debt consolidation loan to erase your personal debt problem is not a very uncommon thing. Countless people are knee-deep in debts. These debts are however very deadly. These can impoverish you financially as well as can strain you emotionally. It is sometimes seen that a sweet family relationship ends up in bitter discord due to debts. Anyways, there are various ways to get out of debt too.

One such option is to opt for a debt consolidation loan. In this financial arrangement, you will get the chance to make a single monthly payment to your lender instead of making multiple payments to all your creditors. The single monthly payment amount that you pay to your lender is less than what you used to pay to all your creditors per month before taking out the debt consolidation loan. This not only helps you pay off your debts after a certain period but it also helps you save something on a regular basis.

Here is why taking out a debt consolidation loan is a good idea:

  • No collateral is needed
  • Usually, debt consolidation loans are unsecured loans. Unsecured loans are the ones for which no collateral such as home, car, etc. is used. So, there is no fear of losing personal assets. Since no collateral is used in the case of unsecured loans, the rate of interest associated with these loans is comparatively more than the rate of interest associated with secured loans. But, you can get a consolidation loan with favorable terms and interest rates.

  • Single monthly payments
  • Consolidation loans are usually issued by the banks. If you take out a debt consolidation loan, you would not have to bother about making multiple payments to your creditors. Just by making a single payment to your lender who has granted you the loan, for a certain period, you become free of debts.

  • Your credit score won’t suffer
  • Taking out a debt consolidation loan is a good idea as your credit score is not also damaged. Because, you are paying off all your debts in full with the interest rate charged.

Do consolidation loans hurt your credit?

People often wonder what is the effect of debt consolidation on their FICO score. When you consolidate your debts, then your credit rating improves as you pay off your debts on time.

Paying off multiple debts with a debt consolidation loan can be a good idea to improve your credit score. However, you need to consider it as a financial plan and use it to repay all your loans including credit card debts. Since your credit card debt will be paid in full and you will repay the single new loan properly, your credit score won’t go down. Once you start making timely payments on your new loan, your credit score will improve over time.

You can also take out a home equity line of credit to consolidate your debts. Your credit score will not drop if you take out a home equity line.

But if you close your accounts, then it might damage your credit score. Debt consolidation does not have a negative effect on your credit. Actually, it depends on how you are handling your accounts. This can happen because as you close down the accounts, the available credit limit gets lowered in comparison to your credit usage. Other than this, the history of the accounts is lost too after some time from your credit reports. So it is better to avoid closing down all of your accounts at the same time. Even if you close a couple of accounts, try closing those which don’t have a long payment history or are relatively the new ones. In addition, you should also ensure sure that the closed accounts get listed on your credit report as ‘closed by the debtor with zero balance.

However, even if you close down your accounts, with time the credit score improves as you make the payments. The payment history accounts for 35% of your credit score. So, if you want to maintain a good credit score despite your closed accounts, you will have to try and maintain your current accounts properly

What credit score do I need for a debt consolidation loan?

Obtaining a debt consolidation loan for bad credit can be difficult. A bad credit score usually ranges from 480 to 500. If you have huge debts, then the chance of acquiring a new consolidation loan is low. Because, the lender will check your credit history. And it can be assumed that your credit score is low due to missed payments or no payments.

If you want to take out a debt consolidation loan, you need to have at least 600 or more credit score. Some lenders can accept scores as low as 580 depending on your income and past debt payoff record.

Why can’t I get a debt consolidation loan?

It is not true that you can’t get a debt consolidation loan for any reason. If you have a low credit score, it can be difficult for you to get the loan. But you can consider other personal loans to consolidate your debts. Many times even the traditional banks might deny you a loan, but you can get a personal loan from individual lenders or hard money lenders. However, usually these loans come with high interest rates. This is the compensation for not having a good enough credit score.

How can I get a debt consolidation loan with bad credit?

Consolidation can be difficult with poor credit reports but not impossible. You might not get a consolidation loan on affordable interest rate so it is advisable not to consolidate your high-interest debts with high-interest loans.

Here’s how you can get a consolidation loan with a low-interest rate.

  1. Go for a signature loan
  2. If your credit score is not up to the mark, you can consider a signature loan. The lenders here approve a loan without considering the credit score. However, avoid any store front or predatory lenders.

  3. Apply for a bad credit consolidation loan
  4. There are many lenders or banks who approve bad credit consolidation loans for people who are looking for a loan.

  5. Go for a personal loan
  6. You can consider taking out a personal loan or a loan from your family or friend with no or low interest-rate.

    • Take out a home equity loan
    • You can take out a home equity loan if you have a low credit rating. The interest on the home equity loan is low. So it will be easier to consolidate your high-interest debts.

    • Apply for a secured loan
    • You can apply for a secured personal loan if you have a low credit score. The interest rate is low, when you take out a loan against a security deposit like a loan against home, land or other assets. But if you default on your new payment, then you might lose control over your assets.

    • You can use your savings
    • You can use your savings account to consolidate your debts. If you use your savings account, then you are not required to pay interest on the amount. It will be easier to consolidate your high-interest debts with your emergency fund.

Should you take out a consolidation loan to pay off credit card debt?

When it comes to managing credit cards, you must always take careful steps so that your credit card bills do not spiral out of control and take a toll on your financial life. If you have accumulated huge credit card debts, debt consolidation loans can help you to merge all the debts so that you can repay them at ease.

Debt consolidation is a good way of bundling your multiple debt accounts and replacing them with a single monthly payment schedule. However, the most common question that is asked by the debtors is whether or not taking out a loan is the right option for paying off debts.

Here in this regard, you should understand that you can consolidate your debts by taking out a home equity loan, a personal loan or a consolidation loan.

I have discussed each loan type before. In short, the consolidation loan is used to repay multiple debts.The debt consolidation loan rates is much lower than that of the credit cards and therefore facilitates the debt payoff method by lowering the monthly payments. The monthly obligations of the debtors are also simplified as they have to make a single monthly payment rather than remembering multiple dates.

Apart from unsecured loans, you can even go for secured loan consolidation options like home equity loans. Home equity loans carry lower rates as they’re secured loans and the repayment term is also longer than the unsecured loans. Thus, you can get multiple benefits through secured loan consolidation. You may even get tax benefits on a secured loan as secured loan debt is considered to be good debt.

Lastly, debt consolidation may seem to be the best option for reducing your debt
burden but you can often accumulate interest rates throughout the long repayment term. There are many people who have ended up spending more by consolidating their debts. Therefore, you must make sure that you choose the right option when it comes to consolidating your debts. However you can take help of a debt consolidation calculator to understand how it helps you to repay your debts.