Have a number of debts that you have to pay? Then you may be better off consolidating all of those loans into a consolidation loan. While a consolidation loan may offer you a number of benefits, there are some things that you should know about the consolidation loan process. Letâ€™s take a look at some of the pros and cons of consolidation loans.
The basics of a consolidation loan
A consolidation loan is a loan from a bank or a lender. You take the money from the consolidation loan and pay off all of your creditors. Afterward, you will pay back the consolidation loan, usually at a lower interest rate from your previous creditors. There is no additional fee to pay.
1). You may not be approved for a consolidation loan
Not everyone can be approved for a consolidation loan. The lender will want to make sure that you can pay back the loan. Therefore, if you have subprime credit or if you donâ€™t have the right collateral, you may not be approved for the loan. It is a good idea to see what lending standards are needed before you apply.
2). You may get a lower interest rate
It is possible that you can pay an overall lower credit rate. However, you will need to have excellent credit to get that lower interest rate. This lower rate comes in handy if you owe debts to multiple credit card agencies that charge a high rate. If you have a credit rating over 750, the debt consolidation loan may be a top choice for you.
3). Your credit score can be impacted
If you decide to go down the debt consolidation route, then there is a chance that your credit score will go down. This could be a problem if you are planning on applying for a home or an auto loan in the future. If your credit is already excellent, then taking a hit on your credit may not be too awful. However, if your credit scores are on the lower side, then you may want to consider another path.
4). It is more convenient
If you find yourself struggling to keep up with all of your monthly payments, then making one payment per month may make lots of sense. Making only one payment may eliminate the chance of having to deal with multiple late fees. Overall, choosing debt consolidation may simply be an easier path if you are trying to keep up with lots of payments.
5). You will have to put up collateral
When you are taking out a consolidation loan, you are consolidating your unsecured debt with secured debt as collateral. If you feel uncomfortable about putting up your home or your car as collateral, then getting a debt consolidation loan may not be the best path for you.
Deciding on consolidation loans
Make sure that you know all the ways consolidation loans can impact your financial life. In many ways, consolidation loans could be a great idea for your future. Make sure you talk to several consolidation lenders before you make your final decision.
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