People in debt often consider consolidation loans as a way to escape their predicament. While these loans can be a good way out of debt, people need to make sure they have the best debt consolidation loan for their situation and know how to find it. In addition, it is important to keep in mind that such loans are not always the ideal course of action.
Basically, debt consolidation loans allow debtors to combine all of their debt into a single loan. If they qualify, the financial institution will pay off an agreed amount of debt. In return, the borrower will take out a single new loan to pay the debt consolidation company back.
Advantages of debt consolidation
Those looking for the best debt consolidation loans often have a lot of high-interest credit cards and other debt. When debt consolidation is done properly, the interest on the new loan will be lower than what they were paying. At the same time, collection calls and other problems associated with the previous debt can be stopped.
There is also the simple convenience, ease in accounting and even peace of mind that comes from having one single loan over many, even if that one loan will last larger. In addition, one’s credit score will improve.
Disadvantages of debt consolidation
To get lower interest loans, the borrower often has to put up collateral. If something goes wrong and the debtor cannot pay, they will be exposed to the risk of losing their homes or other assets that are acting as collateral.
There is also the potential of the total cost of the consolidated loan coming in higher than if the debts had been paid of individually.
Requirements for the best debt consolidation loans
While the requirements will vary with the lender, those who want the best loans will have to show an ability to repay. Current income, the time at ones job and past credit history will all play a role in how high or low the interest rate is. Another major factor is the amount and quality of collateral the borrower can put up. Without collateral, the interest rates are likely to be higher (if a loan can be secured at all).
Do not assume that a consolidated loan will offer significantly lower interest rates. The rates will vary greatly with the above mentioned factors and the policies of the lender. In addition, since these loans are often paid off over a longer period of time, the total cost with finance charges may come out a lot higher with a consolidated loan, even if with lower interest rates.
Try to negotiate with the lender of the best rates if at all possible. Finally, never forget to consider the total cost of the loan over time and not just what the monthly payments are.
Finding the best lender
Remember that even small differences in the terms can really add up over the life of the loan so it is critical to find the best debt consolidation loan. Carefully examine any company before signing an agreement. Check with the Better Business Bureau membership and for complaints against the company online. A reputable company will never charge for consultation and will be open about the process.
In addition, the company should offer financial training and consoling on how to manage one’s money and debt. A major problem with debt consolidation loans is that many people fall back into new debt once they feel their older debts are under control.
A debt consolidation loan should never be taken out lightly and only after all other options have been examined. Sometimes, it makes more sense to put all one’s debt on the lowest interest credit card possible and pay it off that way. However, be wary of these cards since the low rates are for a limited time and one infraction such as a late payment can void the entire agreement.
Home equity loans are different than consolidation loans. While both loans involve the risks associated with the possibility of losing the assets that have been put up with collateral, home equity loans are primarily a way to get cash for the value of a home minus any mortgage balance.
Never forget that staying out of debt is just as important as getting out. The best home consolidation loan will involve changing one’s lifestyle in different ways to include learning to live on less and earning more with part time or other work.