Debt consolidation loans entail a financial strategy in which a person can play one large loan per month at a low rate of interest in lieu of paying a number of smaller loans with higher rates of interest throughout the month.
The popularity of this financial plan comes from the fact that by using this particular debt strategy, a person can cut down on a large chunk of dues from their monthly financial plans and deal with them all at once. This can go a long way in reducing the financial stress on a person.
Debt consolidation loans are mostly used to pay off dues that are not secured. These dues may include medical bills, payday loans, individual debts, and credit card dues.
- Pre-qualification: These loans can easily be availed from banks, online merchants, or credit card organizations. One of the primary reasons people usually consult a debt consolidation firm first instead of directly applying for a loan is because these firms often feature a service called pre-qualification. The objective of this feature is to unofficially calculate your credit score before you apply for a loan and to help you come up with strategies to improve your credit score. This is because most banks and credit card companies will screen your credit score to decide whether you are qualified for a loan or not.
- Interest rates: Debt consolidation loans do not involve the practice of submitting collateral. This makes the process of applying for a loan much more reassuring than all the other alternatives. However, this convenience of the application comes at a price. In the process of applying for debt collection loans, you are required to meet a much higher standard of scrutiny than other debt management loans. The ones supplying the loan will likely tally your debt against your income and judge your credit score to make sure that you are the right candidate for the loan. Sometimes, an applicant with higher credit scores might even be liable to much lower rates of interest than their peers. It is worth mentioning that, unlike banks and credit card companies, debt consolidation loans operate on a simple interest model, not a compound interest model.
Choosing a Company
Here are the parameters that are primarily considered while selecting a debt consolidation firm that is best suited to fulfill your particular requirements:
- Affordable rates of interest: This is perhaps the most important factor for a dependable debt consolidation firm. The interest rates offered for a debt consolidation loan can be either fixed or variable, depending on the lender. It is generally safer to opt for fixed interest rates. Most debt consolidation firms allow you to perform soft credit checks that will help you infer the interest rates and conditions of a particular loan without putting your credit score on the line.
- Period of payment: It is important to pick a loan that you can pay off without having to deposit a large sum every month. Consolidation payments can be spread out across years, and this reduces the pressure to pay every installment on time to maintain a healthy credit score. However, the period of payment should not be so long that you end up paying more money than in other alternatives with higher rates of interest. A good debt consolidation company should be able to help you tally this by the process of pre-qualification.
- Flexibility in repayment: The penalty structure for debt consolidation loans, too, depends entirely on the lender. It is important to choose a debt consolidation fee that offers you some leeway in terms of the scheduled date of payment. The penalty for late payment should not exceed 39 USD.
- Modes of payment: Since the entire principle of debt consolidation rests on the idea of convenience, it is important to pick a debt consolidation loan that provides you with the option to make your payment in whichever mode you are comfortable with. While every debt consolidation plan can be expected to have an option for bank transfer, lenders today are often seen to operate on online payment platforms.
- User ratings: Before finalizing any debt consolidation loan plan, make sure you go through what the users on the internet may have to say about that particular loan. There are numerous websites and forums designed specifically to keep a record of user reviews for different loans. For instance, you can study the Credit Associates Complaints against a particular loan to infer its pros and cons.
Some of the most popular debt consolidation firms that rank highly under these parameters include Rocket Loans, Discover, Upgrade, LendingPoint, and PNC Bank.
Pros of Debt Consolidation
- Lower rates of interest: For a person with a number of small dues with high rates of interest, debt consolidation loans can be extremely helpful. By using the strategy of debt consolidation, the client in question can merge multiple smaller loans which employ compound interest together as one single loan that works with simple interest. The final rate of interest will be lower than either of the smaller dues consolidated in the loan. Thus, you can save a lot of money on interest rates.
- Convenient payments: Instead of paying large chunks of the money every month, debt consolidation loans can increase the period of payment and enable you to take years if necessary to pay off your dues.
- An increased credit score: By enabling you to pay your dues on time, this financial strategy also brings about a hike in your credit score. Apart from this, opening a new consolidation account can result in a rise in your credit score, too, since there will be more credits available to you with the new account.
Cons of Debt Consolidation
- Fluctuating rates of interest: The rate of interest of a debt consolidation loan completely depends on the lender. While there may be certain avenues where the interest is much lower compared to credit cards, there are also other avenues where you will either be liable to higher interests or end up paying extra expenses anyway over the course of the several years of payment.
- Additional dues: As discussed earlier, opening a consolidation account provides you with extra credit. However, along with extra credit, you may also be liable to pay additional dues for that account.
- Better alternatives: Debt consolidation may be a cost-effective finance strategy, but there are more cost-effective options out there that do not involve the risk of fluctuating interest rates. Alternatives such as home equity loans or 0% balance transfer credit cards can offer you even lower rates of interest.
The financial strategy of debt consolidation has become increasingly popular since the beginning of the COVID-19 pandemic. This is because the lockdown conditions imposed in the wake of the pandemic have caused expenses in many households to get piled up month after month.
For some people, the pandemic has caused a drastic drop in sales and productivity and caused them to lose their jobs. With debt consolidation loans, these people can amass enough capital to stay afloat and bounce back from their losses. This article has walked you through all the facts and concepts that you need to be aware of if you are looking for a debt consolidation firm.