When in huge debt and unable to clear off unsecured loans, individual takes the help of a single fresh loan; this is often termed as debt consolidation loan. What actually happens is that, individuals assign for multiple loans in form of medical debts, credit cards bills or for other outstanding payments, with high and different interest rates. This, with passage of time drowns people who have had a history of bad credit or are unable to earn their pay-offs and, ultimately results in a bad state known as bankruptcy. To overcome this situation and discharge the burden, debt consolidation loans are opted for.
Who can help out with this loan and in what form?
Banks, credit unions, payday lenders and many finance companies, offer debt consolidation loans to serve the only purpose of combining all the debts, either through secured loans or unsecured loans. They do not repay your loans for free; you are the one who will still be liable to clear your borrowings but in a simplified and cheaper way. Your new loan could be protected using any of your assets, retirement funds, and insurance policies with cash worth, annuities, lottery winnings and even lawsuit claims. The one left unprotected are very rare these days. Although, they have an interest rate being less than paid in earlier loans, you should be careful giving a blind wave to the contract. At times, lower monthly repayments may result in longer durations.
How is it beneficial?
The loan can be helpful to you in many ways:
- Cheaper interest rate
- Single loan burden
- Safety from bankruptcy
- Reduces stress
- No calls from debt collectors
- Improves credit history
- No property risk( only in case of unsecured loans)
- Less chances of payment being delayed
- Few balance to be paid each month
- Easy to obtain because it is less risky
- Tax benefits in some cases for loan repayment
- Pulls back over spending
Why is it risky?
- The pledged property is at threat.
- Tempt to apply for another loan and make new purchases due to sensing financial freedom.
- Longer term period for loan repayment.
- More complications in the use of the facilities later which may build-up additional higher interest charges.
- Strict rules and regulations as per term of contract.
- Difficult for people with a poor debt history.
- Legal and financial problems could arise if dealt with small lenders.
Rather than asking banks and institutions to make payments, taking self loan can also be positive. Your life insurance plan money or interest from your savings could be used as a repayment source. Other alternatives like, debt settlement programs, credit counseling, bankruptcy reorganization or credit card balance transfers may also be considered for, before opting for debt consolidation loans. But, if no such option is available and you are wise enough to understand your situation and balance it with the essentials of debt consolidation loan, the loan could also support you to reduce your cost significantly and plan an effective budget.