What Are Debt Consolidation Loans?
Today many people pay off several credit debts at the same time. Some people take new loans because they are accustomed to always have money at hand, and someone is forced by serious circumstances. The reasons may be different, but the financial burden, in any case, will be significant. In addition, borrowers having two or three loans at once often simply get entangled in their debts. At the moment, the credit market has a service for the merger of money loans, which is called “debt consolidation”.
What is debt consolidation?
Loan consolidation is the combination of several cash loans from different banks into one debt. With this procedure, the borrower combines all his/her loans and becomes a debtor to only one financial institution.
Consolidation of loans allows you to make the payment of credit debt more hussle-free because you have to repay one loan instead of many. They usually consolidate cash loans in cases where they want to simplify the repayment process or change the terms of lending for the better. It should be noted that the combination of credit debt and refinancing have a lot in common, but in fact, they are different processes. For example, both are used to reduce the total cost of the loan. However, in consolidation, loans are simply combined in one loan, and refinancing is the receipt of borrowed funds to pay off current debt. Of course, banks do not always agree to transfer the client’s current debt to another lender without problems since in this case, they lose part of their profits.
The following debts can be consolidated:
- Credit card debt;
- Student loans;
- Secured loans, including mortgage loans;
- Unsecured personal loans, including express loans and online lending;
- Medical loans;
- Debts for public services.
Debt consolidation benefits
The service of combining loans is in great demand among borrowers since it has many positive aspects. These include:
- The ability to change the amount of the monthly installment on account of debt repayment and other credit conditions. By combining all existing cash loans, the debtor can reduce the amount of the regular payment, as well as change its type and repayment procedure. In particular, consolidation allows you to change a less profitable annuity payment scheme for a more optimal option – a differentiated one;
- More convenient and faster repayment procedure. When all current debts are combined, the borrower makes only one payment every month and only to one bank. Thus, the debtor does not need to visit several creditors to make the next installment. This significantly saves the borrower’s personal time and eliminates the need to collect and store numerous documents confirming the fact of payment;
- Reducing the amount of overpayment on the loan. You can take out a loan to consolidate all other debts at a lower rate by choosing a more profitable program. Therefore, consolidation can significantly reduce the total cost of all current loans;
- The ability to streamline the payment of loans. A large number of current loans is always an increased burden on the borrower’s monthly budget. In addition, it is difficult to pay off several loans at the same time in terms of accounting. Debtors often forget how much, when and to which bank they have to pay off the debt. This results in missed payments and high penalties. The combination of all cash loans allows you to repay debt correctly – without delays in monthly installments and other problems associated with repaying several loans at once.
Cons of debt consolidation
Of course, consolidation has not only advantages – this banking product also has disadvantages.
This list includes the following:
- A small number of financial institutions providing this service. There are currently few banks in the US credit market that consolidate third-party loans. Most often, new, recently opened organizations that do not yet have a sufficient number of clients offer borrowers to combine loans into one. In addition to them, small credit institutions are also engaged in consolidation that usually have a dubious reputation. For such lenders, the main goal is also to attract as many borrowers as possible. Taking any cash loan, especially combining several at once, is always a certain risk for the borrower. If you contact a little-known bank, the level of risk increases significantly. It is better to work with reliable large banks;
- Expenses for a credit transaction. By consolidating all of your debts, you receive a new cash loan. And to register any loan, you need to collect the necessary documents and pay all associated costs. This includes: processing an application, an origination fee, etc. If loans received under the guarantee of third parties or under other security are combined, the list of expenses increases. In addition, consolidation implies early repayment of current loans. And many banks impose a penalty on borrowers for early repayment of debt. That, in turn, also complements the list of expenses when registering a consolidation.
- Before combining the existing loans, you should carefully read the loan agreement carefully;
- It is recommended to calculate in advance the possible benefits of long-term debt consolidation loans, taking into account all the mandatory and additional costs;
- You need to apply for such a service to a trusted credit organization with a fairly good reputation;
- You should remember that loan consolidation only simplifies repayment and does not significantly reduce the financial burden;
- Banks often deny borrowers the opportunity to transfer their debt to another financial institution, so the consent of all lenders must first be obtained.
Tags: Debt Consolidation Loans, loans, money