To survive in this competitive world, you may have taken many loans, at various interest rates, at various times of your life. You have to keep track of all the payments made for these loans so that you pay in time and do not attract a penalty. Instead of this exercise, you can take a $1000 loan and then pay off all your previous smaller loans. So now, you have only one loan to repay and only one monthly interest payment to make. Thus, you consolidate all your previous loans with this one new big loan, which is effectively called a debt consolidation loan. Hence, a debt consolidation loan is a single big loan that helps to merge or consolidate all other smaller loans or debts.
Debt consolidation is not the removal of debts. All your previous smaller debts are simply consolidated in one big debt. The total amount of debt remains the same as before. The difference is that you are paying a single moneylender at a fixed time, instead of paying numerous moneylenders at different times.
A debt consolidation loan can be a secured debt consolidation loan or an unsecured debt consolidation loan. With a secured debt consolidation loan, your home, jewelry, shares, debentures, bonds or any other asset is kept as a security or collateral. This collateral secures the moneylender if you fail to repay the loan. With an unsecured debt consolidation loan, nothing is kept as collateral; hence this loan is usually given to individuals with a good credit score.
If you want to consolidate smaller unsecured debts like credit card dues, higher education loans, unexpected medical bills, etc., then you should take an unsecured debt consolidation loan. Taking a secured debt consolidation loan to consolidate smaller unsecured loans means that you are converting short-term unsecured loans into a long-term secured loan. This puts additional pressure on you for timely payments as your home or any other asset is at stake. However, taking an unsecured debt consolidation loan removes that pressure as nothing is kept as collateral.
The interest rate of a loan depends on the conditions of the interest rate market. If you find that the market is down and you are paying higher interest on your smaller debts, then taking a big debt consolidation loan at a lower interest rate is beneficial. This way you would be paying off smaller high interest loans with a big low interest loan. This would result in saving money if you decide to repay the big low interest loan, in a timely fashion. However, if the big low interest loan were of very long duration, then you would ultimately end up paying more. Hence you have to carefully judge your options and then take the decision that is most beneficial to you.
The general eligibility for taking a debt consolidation loan is that the borrower should be an adult of a minimum of 18 years, should earn an income, should not be bankrupt, and should have resided at the current place of residence for at least three months. However, people with low and irregular monthly income or people with bad credit scores can also take secured and unsecured debt consolidation loans. For people with a higher credit rating and a regular income, the rate of interest would be low. For people with a lower credit rating and an irregular income, the rate of interest would be high.
Many moneylenders offer debt consolidation loans. Some are genuine, some are tricksters, and some are outright frauds. Hence, you must be careful before entering into an agreement with a moneylender whose credentials you are not aware of. To verify the credentials you may check the third-party registrations or other certifications that they may have. You may also ask for references and check them out. It is advisable not to proceed further with any moneylender who does not give a straight answer and who is incapable of answering all your questions.
However, moneylenders like banks, financial institutions, credit unions, and reputable private firms are genuine. You will have to visit their offices, collect the details of the loan, and then finally decide on the offer and the respective moneylender. This process can be greatly accelerated if you research over the Internet. All trustworthy and honest moneylenders have websites, which contain all the pertinent information required for successfully obtaining a debt consolidation loan. The online application forms can be submitted electronically and instant quotes can be obtained. These quotes can be compared and the best deal may be arrived at.
To take the utmost advantage of the debt consolidation loan, you must change your financial habits. If your habits are not changed then a debt consolidation loan only serves to promote your habit of getting into debt. The reason why you went into debt is not looked into; therefore it offers only symptomatic relief and cannot become a cure for your financial worries. You must cultivate the habit of efficient financial management to wipe off your financial troubles.
With efficient financial management, like surrendering all credit cards, maintaining a tight budget, decreasing expenses wherever possible, increasing savings, and taking up a part-time job, the single large debt consolidation loan can be totally repaid. With the continuance of financial management, your savings will slowly build-up, you will never have to take a loan, and you will never be in debt again.
Always remember that a debt consolidation loan, irrespective of it being secured or unsecured, is after all a loan that has to be paid back. The earlier you pay it back, the faster your financial condition improves.