People today may rely on loans for their homes, college tuition fees, new appliances, and more. Others have student loans, credit card debt, car mortgage, and hospital bills that they need to pay every single month. These things can be overwhelming, and it is no surprise that a lot are looking for another option to get out of their loans fast.
Many are looking at several possible life preserver solutions to lower their monthly payments and decrease the interest rates. The methods available for some are refinancing, transferring, balancing, settling, or consolidating all your debts.
It’s understandable that you have fears, especially if you’re new to these kinds of things. With the help of lending institutions, you can do a samlelån or put all your debts in one account and get out of them faster. Some of the things to know about debt consolidation are the following:
What is Debt Consolidation?
This is a process of combining all your loans into one bill. There is a payoff plan that is streamlined for your needs. Before you do this consolidation, here are some of the things to know
- The consolidation will offer a lower monthly payment because the terms are extended. In other words, it will take longer to pay all your debts.
- Interest rates are not a guarantee when consolidating. (You could get a higher one if you call the wrong company, which is not advisable).
- Consolidation has annual fees, closing costs, balance transfer fees, and extra loan setup expenses.
- The entire thing does not mean that you will be eliminating your debts forever.
- The combining of loans is different from the settlement.
How Does the Process Work?
When a person consolidates their loans, they get one big amount to cover all their smaller debts to different people or banks. This is quite convenient, so there is only a single amount that you’re concerned with instead of several different ones every month. The processes may be as follows:
- Fill out an application online or in-person and make sure to provide accurate details.
- Lenders usually inspect your credit rating and the ratio of your debt-to-income before approving the application.
- You provide some documents about your finances, current debt, insurance, mortgage, and identity.
- There’s a thorough evaluation that will happen, especially if applying for loans with no collateral.
- You will or will not get the loan based on the evaluation. In some instances, the lenders will be the ones paying off your debts now, and they will set up a repayment plan for you. At other times, you will receive money so you can use the funds whenever you want.
What are the Types of Consolidation?
There are two types of consolidation, and these are unsecured and secured loans.
If you take out secured loans to combine all your loans, you must put one of your assets like a house or car as collateral for the lending institution. This is one of the worst ways that you can level up your debt. You have a consolidated debt, and the companies or banks can go after your home or car if you miss a payment.
If you are taking out an unsecured loan, you are not required to offer your assets as collateral. This is a great deal for many people, but since the companies know that the process is risky, the interest rate that they charge is higher. Learn more about unsecured loans here.
The loans can fall in either of the two depending on the financer’s terms. Some of these offers may come from peer-to-peer lenders or banks. You can find individuals offering these, a crowdlending group, and cooperatives that want to earn.
Peer-to-peer lending is prevalent today, but this does not mean that you have to jump on the bandwagon. This trend is common because people think that their peers are lending them through the goodness of their hearts. However, this is not the case. They are running profits, and they do this through your financial problems.
Transferring your credit card balance is a very effective way of consolidation. This is where you apply for a new credit card debt to pay off the old one. The method comes with various fees and other conditions. The huge spikes are usually apparent in these kinds of transactions when you are late in paying your dues.
Another thing is that the system will give you a lot of rewards or points. You think you may rack up a lot of credit card rewards, but you are essentially spending money with interest on top of it. The risks are not worth the few couple gift cards and airline miles that you can get.
The points can get you a single burger, but the interest may have enabled you to purchase a new appliance. If you are already struggling with a massive debt on credit cards, getting a new one is not going to be the solution.
Home Equity Line of Credit
Homeowners may use a home equity line of credit for consolidating. This will allow you to borrow money tied to the value of your house. The equity that you’ve built up for years is going to be used as collateral.
Equity is different depending on the current market value of your property and the amount you still owe on your house. With a home equity line of credit, this is your way of giving the bank the portion you actually own in case of default. You’re essentially trading this to pay off other debts so that you can get more. This is how you stay behind, but everything will be longer.
There are the student loans that you may have racked out while you are still studying. Federal students have the option to roll all their debts in one single lump sum of payment. Private student loans can look into refinancing options, but they should do so wisely.
The Most Important Factor to Consider
While you will be able to make your life easier when it comes to budgeting, one of the factors to consider when it comes to debt consolidation is the interest rate. The average annual percentage rate or APR in credit cards is 16% to 17%.
Assuming that you are only going to pay the minimum amount, every month and this should be on time to avoid the lay fees, you may have to make payments monthly for up to 17 years if you are not careful. The interest is about $7,000 during that time, according to CNBC.
Meanwhile, in peer-to-peer options, the APR score can be as low as 4%, which is already the prime rate. The current APR, according to the Fed for personal loans, is 9.63%. As an example, you may have a $10,000 credit card debt with a 16.61% APR. If you can pay this for three years, you need to have a total of $2,656.53, and this amount is the interest alone. Loans with APRs of 9.63% would result in a $1447.90 in interest, and the remainder of the amount is your potential savings.
Before you apply for any kind of loan, you should pre-qualify with several companies and look for a lower APR. You will know your APR when you input your personal information like employment status, annual income, date of birth, social security number, and contact info. While the numbers are not a guarantee, these are usually the average rates that you will qualify for. If you get a higher rate, it is best not to consolidate.