As the concept of consolidation loans has reached widespread popularity and is certainly a phrase that most of us have heard. However many of us are still unclear on how consolidation loans work exactly, and how to benefit from them. This article aims to provide you with all the details you’ll need to understand consolidation loans, and perhaps enable you to apply the concept towards improving your financial wellbeing.
Debt consolidation refers to the act of taking a new loan for the main purpose of paying off some or all of your existing qualifying liabilities such as loans, credit cards, etc. By combining your current liabilities into a single larger loan you can potentially gain improved monthly cash flow through the negotiation of favorable payoff terms, or a lower interest rate, or both.
With a normal loan application you will need to apply, share all needed information and documentation, undergo risk and affordability assessments, then once you meet all the needed criteria the loan is approved and the money paid out to you. Consolidation loans are similar, and in fact, you can apply for a normal loan with favorable terms and just pay off all your debt yourself.
What makes a consolidation loan different from a normal loan is that your intent of paying off existing debt with the money is factored into the risk and affordability assessment. Depending on your current debt in relation to your household income, you may find it impossible to attain a large enough normal loan to consolidate your debt yourself, as you do not meet the needed affordability criteria. By taking the debt that will be paid off into consideration, the affordability calculation for a consolidation loan has a much higher chance for approval. Financial institutions then manage the risk by directly settling the intended loans, instead of paying the money out to you.
An important point to note is that debt consolidation loans don’t erase the original debt, instead they simply transfer the outstanding debt to a different lender or type of loan. Debt review should be considered when you find yourself in severe financial despair where the potential reduced monthly payments brought by a consolidation loan is not enough, or you're simply unable to qualify for any consolidation loans.
Debt review aims to assist you in reducing your debt obligations. Debt review organizations or credit counseling services will engage with creditors on your behalf, and renegotiate your outstanding debt amounts, repayment terms, etc. Debt review will have a negative impact on your credit score, and future ability to attain credit. Whereas a consolidation loan will not have a negative impact on your credit rating.
Consolidation loans are a great tool for people who have multiple debts with high-interest rates and high monthly installments. And may provide you with the following advantages:
It may be a good idea to consider consolidating your debts for one or more of the following reasons:
Debt consolidation will not have any negative implications on your current credit score. In fact, it can potentially assist in positively improving your credit score since you're less likely to miss a payment on a single loan instead of multiple individual accounts.
Qualifying accounts usually include a range of loans (excluding home loans), credit cards, and retail accounts.
As aforementioned you may apply for any single normal loan large enough to cover the intended debt. However, you may have trouble meeting the needed affordability criteria to do so. Therefore you will need to approach one of the many financial institutions that offer a specific debt consolidation loan option.
The application process will be specific to the financial institution you choose, however you should be able to quickly get the needed information from their website, or by contacting them via phone or email. Some of the common documentation that may be required for the application include:
The first step will be to better understand your credit rating and to identify the events or behaviors that contributed negatively to your rating. Luckily we have access to all major credit report providers, this information should quickly assist us in determining the exact factors that have lowered your credit score and allow you to correct them.
Some negative impacting events listed on your credit score may be incorrect, outdated, or lead from simple misunderstandings between yourself and creditors. These can potentially be rectified in a short amount of time by engaging with the organization responsible for adding the negative item to your score, and through negotiation and discussion have them rectify it from their side.
Lastly, the most important thing that you can do to boost and maintain a good credit score is to use the credit that you do have responsibly and adhere to the below:
Contact us to see if we can help you with a loan to help manage your debt better.
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