What is a debt Consolidation Loan?
Debt is something we all can do without. But to be realistic, we dig these holes ourselves and before you know it, we can’t get out of them. We participate in extravagant activities and buy extravagant products without much thought about how we are going to pay for them in the future. You are then left scrambling for financial survival and you panic. With immense financial responsibilities, desperation suddenly calls and you are left with no choice but to look for solutions that you usually wouldn’t go for. It does however, offer some sort of relief to overwhelmingly ‘deep in debt’ individuals.
First let us understand what debt consolidation loans are. A debt consolidation loan is when an agency that specializes in this kind of business pays off all your existing debts and then combines all of them into one monthly payment with a whole new interest rate, which you will be paying them directly.
There are two kinds of Debt consolidation loans. They are:-
- Secured- This is when you have an asset binding agreement which most of the time involves a house or car. They have lower interest rates than the unsecured ones.
- Unsecured- This is just goes by your word. You promise to pay the loan within certain duration of time. These often are loans that have to do with medical bills or credit cards.
The different kind of institutions that offer debt consolidation loans
They offer loans and examples of these banks are:-
- Wells Fargo
- U.S Bank
They give out loans which are both secured and unsecured.
Lenders that are specialized
These are better known as finance companies. They pay off old creditors and then they send you a direct deposit or check for the full amount. They can also send you a monthly bill each time for the total amount with a whole different interest rate. Debt consolidation loans are then financed by them and they do not have tough requirements like most banks do.
The payday Loans
These types of lenders do not do a background check on you like most financial institutions. They give you the loans that have over 15 percent interest. That is how they make their money because the interest rates are so high; you keep taking them money that hardly touches paying your initial loan. If you have a huge debt, it is advisable not lend from them. You can make payments weekly or every two weeks, depending on your agreement.
The Credit Unions
This financial institution also offers debt consolidation loans with fixed or discounted rates in duration of 12 to 60 months. If you have good credit, their interest rates are not as high as the banks.
You can take out a loan from your own 401k plan. You can borrow at least 50%, depending on how much you have managed to accumulate over the years. Good thing is; no credit check is required. You just pay the interest rates while still working.
Be advised though; if you should leave your job for any reason, you are required to pay the whole amount within a timeframe of 60 days.
The Advantage of getting Debt consolidation Loans
You are able to pay off all your debt from medical bills, credit cards and it is all rounded up to one lump sum figure with only one interest rate. You won’t have to worry dealing with various types of debt collectors and it offers a piece of mind without the hounding from calls and letters.
It helps with your budget and you are able to plan forward without worry. Most debt consolidation loans have a very low monthly payment and it saves you quite a bit of cash if you are in a bind with many financial responsibilities.
The Disadvantage of Debt consolidation loans
If you are seriously considering seeking out Debt consolidation loans, there are few things you need to know. Weigh out your options before venturing into these deals because there are details which they conveniently forget to let you know about.
A debt consolidation loan will keep you in debt, rather than stay out it. Most of these financial institutions have very high interest rates that make it almost impossible for you to clear your debt. You will get comfortable paying the low monthly payment but never reach to paying your initial debt because you are only touching the surface; and that is just the interest rate.
Seek out credit counseling first to weigh out your options and find alternatives to your huge debt. Debt consolidation loans can save you big time, but the phrase “From the frying pan, into the fire” can literally be used here. You get saved, but then you get enslaved right after that.