Loans can become a heavy load for everyone. People often struggle to pay off their loans and creditors. In such a scenario, debt consolidation could be a great savior.
If you do not know much about debt consolidation loans, we can help you out.
In simple words, a debt consolidation loan consolidates all your payments and pays them off. To do this, you will be taking a loan for the debt amount.
This guide provides a more detailed idea about debt consolidation loans and how you can do it properly.
What Is Debt Consolidation Loan?
A debt consolidation loan is a great strategy to take a loan to pay off all your debts.
These loans generally have low monthly payment amounts and a low interest rate.
Many people become overburdened with loans and are unable to pay them on time.
When you fail to pay loans, it affects your creditworthiness. That can be problematic when you wish to take loans or other types of credits in the future.
You can take a debt consolidation loan to pay off small liabilities like credit card bills, small loans, overdraft balances, and others.
When you take a debt consolidation loan, you combine all your small payments and make a huge amount. That generally gets done when a loan amounts to more than $10,000. With the debt consolidation loan, a huge level of stress will get decreased.
Different Types Of Debt Consolidation Loans
Before you think of applying for a debt consolidation loan, you need to know the types of present loans.
There are two major types of debt consolidation loans.
They are unsecured loans and secured loans.
In a secured loan, you will need to keep collateral against the loan.
That means that you will need to put up your house, car, or any other asset in exchange for the loan. If you cannot pay off the loan amount, the bank will have ownership of your asset.
The risk factor may be there, but you will get a much lower interest rate. If you can pay off the loan on time, you get back ownership of your collateral asset.
On the other hand, an unsecured loan is one where you do not have to keep collateral with the bank.
However, here you will get a higher interest rate as compared to secured loans. That is because the bank will have no means to pay off the loan if you cannot.
The absence of collateral is a great relief for some people who do not want to risk their assets.
One great thing about both these loans is that the interest rate is fairly less. Moreover, they are also fixed interest rates, so you do not have to worry about them fluctuating. That makes it easier for you to pay off the loans.
Requirements of Debt Consolidation Loan
To apply for the debt consolidation loan, you will need to submit certain important documents. Below are the necessary information and documents that you need to provide the lender.
- Income proof
- Equity or collateral (asset)
- Credit history
- Financial stability or creditworthiness
- Proof of employment
- Letters from creditors or repayment agencies
- Statement for two months for any credit card and loan that you will pay
After you have all the necessary documents, you need to determine the loan amount you wish to pay off initially.
However, this decision rests with the lender, depending on your payment requirements.
Generally, the loan with the highest interest rate will be the one to be paid off first. Slowly, this loan will also take care of the other debts. If you follow a proper plan as suggested by your lender, you can be completely debt-free within a few years.
Process of Debt Consolidation Loan
You can get a debt consolidation loan from a credit union, financial institution, bank, or credit card company.
However, to get the loan, you will need to follow some basic eligibility criteria.
Below mentioned are the necessary eligibility criteria.
- 21 to 60 years of age of the applicant
- A dedicated monthly salary as required by the financial institution. That will vary depending on the country, state, and several other factors.
- The work experience of the applicant
- Documents as required by the bank
- A good FICO score (lenders may make some exceptions)
If you can fulfill all the eligibility criteria mentioned above, then you can apply for the loan.
Ensure that you check if the bank has any other requirements that you need to fulfill.
After meeting the eligibility, you will have to follow a process for the application.
- You first need to check out the official websites of the financial institutions you have shortlisted.
- Compare the institutions based on their loan interest rate, terms of payment, and other such elements.
- Once you have chosen a lender, gone through their requirements, and match their eligibility, you need to fill out their form.
- Ensure that you put correct details; otherwise, the loan might get rejected
- Provide all the necessary documents and wait for the loan to get approved
How to do a Debt Consolidation Loan Properly?
To ensure that your debt consolidation gets done properly, you need to follow the proper process.
- List the payments that you need to make. Make sure that you note all your incomes and expenses. Furthermore, make a note of your monthly income to know how much you can pay for the loan.
- You will need to find out your FICO score for the loan application. If the score is high, then you get a better loan deal.
- Check out your options for the types of loans that you can get. Compare different lenders and their loan schemes.
- Choose a lender that aligns with your income, expenses, and debts. After you have every document ready, you can start the process for a loan application.
If you feel that your debts are becoming too much to bear with your income, debt consolidation loans are your perfect choice.
They can get rid of your burden and also ensure that the debts are getting paid on time.