Crippling debt is just one of the many problems low-income families face. A debt consolidation loan may help you manage payments easier, but remember these loans are not right for everyone.
How does a debt consolidation loan work?
A debt consolidation loan is a loan just like any other money you might borrow from a bank or institution. The difference is the purpose of debt consolidation is to combine multiple debts into one payment, hopefully with a lower interest rate. The loan works by combining the amount you owe on credit cards, medical bills and other debts. Once they’re combined, the debt consolidation loan pays them off so you’ll just have the consolidation loan to make payments on.
While the loan payment may seem higher than what you would normally pay, you must keep in mind that the loan payment combines other smaller loans that you have. The biggest benefit that comes with debt consolidation loans is the low-interest rate that could save you money.
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How do you qualify for a debt consolidation loan?
Just like any other loan, you’ll need to qualify. Different debt consolidation loan companies have specific requirements but you may need to have fair to good credit. Many people who have poor credit will qualify, but they could end up paying more in interest because of their poor credit. The better your score, the lower your interest rate will be with any debt consolidation loan company.
If you own a home, you may have more options with a debt consolidation loan. You can use your home equity as collateral for the loan and that will help you qualify for a higher amount. Be careful doing this, though, because if you are unable to pay the loan you may lose your home.
Who should consider it?
Those who have a lot of debt from various sources will be the best people to use the debt consolidation loan. Those who are paying very high-interest rates may also be better suited to using the debt consolidation loan. The consolidation loan will not only reduce the amount you’re paying in interest but it can also reduce the number of bills you must pay each month.
Who should avoid it?
A debt consolidation loan is not right for everyone. People who should avoid debt consolidation include:
- Those with poor credit who may end up paying more in interest
- People who do not have a mix of debt types
- Individuals who are unable to make their debt payments already
- Anyone who wants to pay off a credit card just to max it back out again
A debt consolidation loan is not bankruptcy. It will not make your debt go away. It will simply restructure the way you pay your debts each month. You will still be responsible for making the payment to the loan company just as if you were paying it directly to your original debtors.
How do you find the best debt consolidation company?
Not every debt consolidation company is reputable. In fact, many in the industry claim to help when they’re really not doing you any good. In general, a good debt consolidation loan company will have real reviews from people who used the company in the past, a good BBB score and a strong presence online or in the community.
Consider talking with your local bank or credit union. They may offer a debt consolidation loan.
Always look for the lowest interest rate possible. It’s the best way to save money and help yourself pay off all the debt you owe!
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