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Debt consolidation loans
Having a lot of debt and getting stressed paying them off individually, why not opt for debt consolidation loans.
Debt consolidation has helped a lot of borrowers who have not been able to pay off their loans successfully due to the number of loans they have.
A loan which is termed as a debt consolidation is an amount (huge amount) taken by a borrower to pay off numerous loans.
This leaves you with one loan to pay off or service and in most cases the interest rate is much lower if compared to all the interest rates of the other loans put together.
Having a lot of debt you are servicing can be very tiring in the sense that at the end of every month lenders will be on your case to pay of their loans.
When you have the resources to pay off the loans it can be more manageable than when the debt has put a strain on your finances.
Even when you have the resources, the process can be tiring and stressful.
It is in the best interest of any borrower who has so many debts to think of measures to reduce the debts so you can escape any financial crisis.
Using different types of debt consolations programs will help relief you of the burden of servicing several loans at the same time.
What borrowers need to know is that, though your debts are paid of with the debt consolidation loan, it doesn’t mean your debts become less.
Your debts don’t reduce but rather all are bulked up into one loan from one lender, which makes it more convenient to service than when the debts are scattered about.
How debt consolidation works
There is no borrower who can say he or she is okay with multiple debts and also dealing with multiple lenders.
The number of accounts you have to deal alone is enough to stress you out.
It can easily make you either delay on paying a debt because you are handling the others or totally forget one or two debt during the month.
To avoid all of these, you need to think of taking debt consolidation loans or sign on to a debt consolidation program.
This is how debt consolidation loans works : when you have several debts, you are required to pay it off but most loans have schedules where you pay the loans in installments.
With this type you pay off the loans at the end of every month or as agreed by both lender and borrower.
If the loans are many at the end of the month you will be swamped with so many payments to make.
To avoid stress taking a consolidated loan is the best way to lesson your burden.
You take a huge loan from the lender that covers all the debt you owe so that you can pay off all your debts.
When you do this, you will have only the huge loan you took to service.
It gives you the chance to concentrate on one loan, making it easy for you to pay back gradually.
Debt consolidation loans can be such a relief especially when you have a collateral as security for the loan.
Borrowers of debt consolidation loans have options to either go for secured or unsecured debt consolidation loans.
Secured vs. Unsecured Debt Consolidation Loans
Unsecured debt consolidation loans do not require a borrower to bring collateral just like loans like cash advances or credit cards.
In this instance in case of default which is not what any borrower intends to happen but anything is possible during the life span of a loan.
A borrower can default and be cause there is no collateral the borrower will not lose any asset.
What lenders do however is to ask for cosigner, ask for the borrower to have a very good credit score or charge very high interest rates on the loan.
For secured debt consolidation loans however, the lender requires the borrower to bring a security in the form of an asset such as a house, a car or valuable jewelry.
Most borrowers prefer a house or a car but the car must be a new car that will have good price on the market.
Some lenders even accept businesses as collateral from their clients.
Lenders secure themselves with these assets which they value to make sure it cost the same as the money being borrowed or in most cases more than the amount being borrowed.
So that in case the borrower defaults in payments or refuses to pay back the loan, they (lender) can take over the assets and sell to make back the money borrowed.
With these two different types of debt consolidation loans (secured and unsecured) the features are different so before you decide to go for any of the two think about it carefully.
Is secured or unsecured debt consolidation good for you?
First of all you must look at how quickly you need the debt consolidation loan.
And then you can begin thinking of your financial status or if you have a very good credit history and lastly whether you have an asset you can use as security for the loan.
In the case of unsecured and secured loans, lenders prefer secured loans because they get to ‘breath’ in the sense that they know they have something to fall on in Case of default.
Having a bad credit history or maybe you are now building your credit, any lender will be more comfortable giving you a secured loan as to an unsecured loan.
A good thing about secured debt consolidation loans is that, lenders give it at a much lower interest rate because of the security that is attached to it.
On this score it will be better to go in for a secured debt consolidation loan to save some money.
Also the loan (secured debt consolidation loan) gives a borrower the chance to borrow a higher amount to take care of all the debts that needs to be consolidated.
Because with an unsecured debt consolidation loan, you will get it at a much higher interest rate because lenders do not have anything to fall in in case of default.
Downside of debt consolidation loans
Consolidating of debts is a way to relief borrowers of the stress of having to service several loans at the end of the month.
In as much the upsides of debt consolidating is enormous, there are also downsides to it.
Below are three major downsides to debt consolidating :
Debt consolidation loans really don’t make your debts go away, what it does is to put them together.
• So in the end your troubles won’t go away but still very present making consolidation loans a typical case of moving your luggage to another lane but luggage is the same weight.
• With debt consolidation loans you can pay off your debts on credit cards as well as store cards but these cards are not cancelled or closed.
So you can have a consolidation loan you are servicing and still start using the cards again. Especially when you need to purchase something urgently.
When this happens, you will still have the consolidating loans and the credit card loans to pay back.
• Interest rates on debt consolidation loans are high when it comes to unsecured debt consolidation loans.
You might get it just a little lower when you go for a secured debt consolidation loan.
Bearing in mind that if you put your house or car as collateral you can lose it when you default on the loan repayments.
Types of unsecured debt consolidation loans
1. Pay day loans
2. Personal loans
3. Peer to peer loans
4. Line of credit
5. Term loans
You can get these types of loans from the traditional banks, non-bank financial institutions and other financial institutions.
With term loans, the amount you get from the financial institutions is as a result of discussions between you the borrower and the lender.
The money borrowed has specific rules attached to the loan with regards to the interest rate which differs when you have a good credit score or not.
The repayment schedule is also specific which can either be monthly, two weeks interval or even weekly.
As a borrower you have the option of consolidating your debt yourself by taking a personal loan.
This can be considered an advantage because the need for a professionals help is cut out.
Also with personal loans, lenders don’t ask for a lot of documentation when it’s an unsecured personal loan.
The only thing is that your credit scores must be very good or you can get someone who has a very good credit scores to cosign for you.
Some lenders do accept this so that when you default on your loans the person who co signed for you can be held accountable.
Peer to peer loans
If you have access to money you need from friends and family instead of a financial institution it is the best.
This is because you will most likely get the loan at no interest rate and also you will get it very quickly without providing any documentation.
Pay day loans
Pay day loans simply means borrowing money in anticipation of your salary or pay day.
Some of these expenses may be urgent situations such as paying of medical bills, repair of a broken down car or paying of rent which has been in arrears.
It is a very convenient way for people to get money quickly so a lot of borrowers opt for it.
However, this loan comes at a very high cost as high as three hundred percent or above.
Line of credit
These kinds of loans are normally unsecured loans although some can be secured loans.
Your credit scores as well as your income determines how much can be loaned to you.
Having a good relationship with your bankers helps you get a good deal with them.
If you want to go to a financial institution where you do not have a relationship with, then your credit scores must be perfect and also have a very good income level.
Types of secured debt consolidation loans
1. Home equity line of credit
2. Home equity loan
3. 401(k) loans
401 (k) loans
This is sometimes referred to retirement loans. It is not the best to take a loan from your retirement money but in times of needs you can make an exception.
A lot of Americans have used this kind of loans to either consolidate their loans or to sort out a pressing financial need.
It is estimated that about twenty percent of American people have borrowed from their retirement funds.
The reason Americans have started taking loans from their retirement fund is because the amount taken comes with low interest rates.
With that said it is good to note that if you default on the 401(k) loan you will be penalized for it.
Most notable one is that your retirement fund will not grow to benefit you when you actually retire from active service.
Another penalty is that until you pay off your loan, you are not allowed to pay your contributions to the fund.
Also what is a major deterrent to some borrowers is that when you default on a 401(k) loan, the outstanding balance is taxed because that amount is considered as an income.
What managers of retirement funds do is to charge early withdrawal fees when you borrow from your fund especially when you are fifty nine years and below.
Home equity loan
Borrowers have the notion that when they use their homes as security for a loan the amount of money will be equal to the worth of their home.
This is definitely not the case with home equity loans especially when you still haven’t finished paying off your mortgage loan.
Lenders make sure to take out the amount left to be paid for the mortgage before granting you the loan.
So in this sense if you just got your home from a mortgage loan you cannot use it as a home equity loan.
Especially when lenders do not give you the hundred percent the amount of your home.
If you have a good credit history, lenders can up your percentage to as high as eighty seven percent of your home’s value.
Home equity line of credit
HEL and HELOC (Home equity loan and home equity line of credit) sound similar and are actually similar but not the same.
Though your home is the common denominator the features or process are quite different from each other.
Which one a borrower choses is actually the choice of the borrower as well as your financial status.
How the home equity line of credit loan work is that your lender gives you a lump sum and you take from that amount as and when you need the money.
The interest rate on the repayments every month can be high or low depending mainly on the base rate since the interest rate is variable.
The interest rate every month affects only the amount you took from the lump sum instead of it affecting the whole amount.
So if you have a line of credit of two million dollars and you use ten thousand for the month, you will only pay interest on the ten thousand and not the whole two million dollars.
Downsides of secure debt consolidation loans
First of all debt consolidation is only possible with unsecured loans so if you put an asset as a collateral for the loan , you stand a chance of losing your asset in case of default.
Putting a property up as a collateral for a loan may be the only option and you definitely have no intention of losing your property.
But unfortunately things happen all the time in our lives that we do not have control over that can cause that to happen.
It will therefore be in the borrowers interest to try as much possible to avoid defaulting on a secured loan.
Just in case something happens to affect the repayments, it will be better to go to the lender and have a discussion so another alternative agreement can be reached.
Upsides of secure debt consolidation loans
Secured loans are not for everyone, especially when not everyone can afford to put up their property as collateral to loan.
In another sense too, not everyone owns a property to put it up as security for a loan.
However if you have the opportunity of having an asset you can use it as a security for a loan because there are benefits to it.
With a secured loan the likelihood of you getting the loan at a lower rate is very high.
When this happens, as a borrower you get to have an affordable or low repayments.
The thing is that if you have high repayment at the end of every month, it may eat into your budget for the month which can be a burden financially.
Any financial institution that gives secures and unsecured loan will prefer secured loans because they are less risky and it’s a security for the amount the give out.
Fortunately if you have an asset as security for the loan, the lender will not be bothered about your credit scores.
Difference between debt consolidation and debt settlement
These tow terms are used interchangeably but they are not the same in anyway.
As discussed or explained in the above post, debt consolidation is the process off putting all your debts under one umbrella by taking a loan to pay off all the other debts.
This leaves you with one loan to service instead several debts at the end of the month.
Debt settlement on the other hand is when you get a company to talk on your behalf to those you owe to pay a block sum of your debt but this amount will be less than you owe.
Services of debt settlement companies are not free as they are working to make profit.
These companies charge what they term ‘settlement fees’ and charge between thousand dollars to three thousand dollars.
If a debt settlement companies that tell you to stop making repayments for your loan so they negotiate for you are fraudulent and you must be careful of them.
They promise you so much to convince you to pay their fees so you get your debts reduced.
Unfortunately most of the debt settlement companies, don’t stick to their side of the bargain.
Because not all lenders accept this offer of you paying back a bulk part of your debt but not all of it.
But the debt settlement companies will make it look like they have done their part after you have paid them.
Bear in mind that the money you pay to debt settlement companies as settlement fees are not refundable.
So to avoid being scammed by such companies, make sure the settlement is complete before you pay the debt settlement company any fees.
Otherwise if the negotiations do not go as planned, you will have more fees to pay plus your loan you are struggling to pay.
Debt consolidation loans are very beneficial to borrowers who have collateral to put down as security for the loan.
Because they get the loans at much lower interest rates as compared to borrowers who do not have any security to put down for the loan.
However if you have so many debts surrounding you and having a hard time paying them off, debt consolidation loans will be the way to go.
The interest rates will be high, but it will save you the pressure of servicing several loans.
Taking a debt consolidation loan can relief your stress from lenders chasing you for their money at the end of the month.
If you do not have an asset to use as collateral make sure your credit scores are good and you have a good income level so that your interest rate will not be sky rocketing.
Disclaimer: All loans offered through this website are subject to credit and underwriting approval. AfterLoans.ca is a lead referral company, not a lender. AfterLoans only works with financial service providers that adhere to Canadian laws and regulations. Our lenders lend from $500-$5,000. Loans amortization is between 6-36 months. APRs range from 19.99% to 55%. The actual APR charged will depend on the lender’s assessment of your credit profile. For example, on a $1000 loan borrowed for 12 months at 29.9%, the monthly payment will be $97.24; with a total repayment, including interest, of $1166.88 There is also lender’s optional loan protection policy. In the event of a missed payment an insufficient funds fee of around 45$ may be charged (dependent on the lender). If you default on your loan payment plan the lender may terminate the plan and the remaining balance will become payable immediately. Our lenders employ fair debt collection practices, but will pursue the payment of Outstanding debts to the full extent that Canadian law allows.