Uderstanding Consolidation Loan

In the course of your research for a loan, you might have come across the term, “consolidation loan” or “debt consolidation.” Ever wondered what it means? We’re here to tell you. 

Today, we will be exploring what a consolidation loan is, the forms it can take, and the considerations to make before going for a consolidation loan. 

A proper understanding of these will help you organize and streamline your income and other aspects of your financial life. 

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What is a Consolidation Loan?

A consolidation loan is one taken to pay off other debts. From your utility bills to car loans, student loans, medical bills, shopping bills, rent arrears, and more, a consolidated loan basically takes care of all the bills for you. The debtor calculates his existing debts and takes one lump-sum loan to settle them, leaving him with only one monthly repayment—the consolidation loan.

Some money lenders market personal loans solely for consolidation, whereby you can get as much as $50,000 to consolidate your debts. 

Consolidation loans may be secured or unsecured, depending on your service provider. However, because it is a large sum, most providers prefer to have some form of security or a high-level documentation process. 

Forms of Consolidation Loan

A consolidation loan can come in various forms, namely:

Personal Loan: You can take a simple personal loan to consolidate your debts. Some lenders give out personal loans solely for this purpose. The good thing about this kind of consolidation loan is, you can consolidate all kinds of debts: medical bills, shopping expenses, school fees, and so on. 

Home Equity Loan: If you have a high credit score, you can apply for a home equity loan.  This gives you a large sum of money with a long repayment time, and at a fixed rate. The interest rate is also usually considerably lower than for personal loans.

This kind of consolidation is like an additional mortgage, adding an extra monthly repayment to your bill. People who want a longer repayment period frequently prefer the Home Equity Line of Credit (HELOC).

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Should I Consolidate My Debts?

Usually, people ask questions about whether or not to go for a consolidation loan. In some instances, it’s a smart move, and in certain instances, it’s not. Here’s how to determine:

Things to Consider before Consolidating Your Debts

1. Check the interest rate on the consolidation loan. Is the monthly interest rate lower than the rate on all your other debts combined? If yes, then it’s a smart move; otherwise, you’re just throwing yourself into more debt. 

2. Since most consolidation loans are a lump sum, the amount you would be repaying monthly—the principal amount plus the interest—may be on the high side. Can you comfortably afford that amount every month without starving? One of the things to consider is your income. If the total repayment will take up more than half of your monthly income, you may be getting into some trouble. 

3. Remember that without consolidation, your other debts may not be cleared at the same time in the month, giving you time in between each payment to make some more funds. But with a consolidated loan, the sum is cleared at once. Will you freak out if such an amount leaves your account at once, or will you be fine?

4. Most consolidation loan providers will give you between 2 and 7 years to clear off the debt. But if the time is shorter, that means the amount deducted monthly would be higher. Consider that. 

5. If you’re someone who likes to organise their processes, consolidating your debts is definitely a good idea; all your payments will be streamlined, and you’ll not have to worry about keeping track of several due dates.

6. The debt inquiry that comes with consolidation drops your credit score by a few points; hence, this is another consideration. If you don’t mind your credit score dropping, then you can apply for a consolidated loan.

Frequently Asked Questions 

Is a Long Loan Repayment Term Good for a Consolidation Loan? 

Yes, it is. A longer loan term means that a lesser amount is cut from your monthly income, so this is good. However, this longer term could also trigger an increase in the interest rate, so ultimately the choice is yours – would you prefer to pay higher monthly so you can clear your debts faster, and with less interest, or would you prefer to spread it over a period of time so you don’t overstrain your income? 

What is a Secured Consolidation Loan? 

This is a loan that requires collateral as security before the loan is advanced. It links your assets, such as houses, land, or cars, to the credit. In the event that you are unable to pay your debt, these linked assets may be foreclosed. Whereas, an unsecured consolidation loan requires no asset as collateral before the credit is advanced. 

What Sort of Debts Can be Consolidated? 

Some of the loans you can consolidate are: utility bills, car loans, student loans, medical bills, shopping bills, rent arrears, and a lot more. Quite a number of bills can be consolidated; there are really no restrictions.

Your service provider will review your debts and determine whether or not they are eligible for a loan consolidation. Some debts that may not be eligible are: home loans, tax debts and secured loans.

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Do debt consolidation loans get paid to you?

Usually, the money is sent directly to your debtors, so they can fulfill their immediate purpose. However, if this is not the case, your service provider will let you know.

 It’s Time to Consolidate Your Debts…or Not? 

Consolidation can be a good move, or a bad move. Just like when playing cards, you have to be tactical. You have to know when to play your cards. You have to take all the aspects we discussed today into consideration. 

If you play it the right way, consolidation will get you out of debt and into a steady financial space. But when played wrongly, consolidation might be your next bad move. 

So understand the concept of consolidation. Think it through. Read more articles on it if you need to, and make your decision. We trust you to make a healthy financial decision.

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