Hardworking people can incur too much debt when household income falls as monthly obligations continue to rise. Strategic use of personal consolidation loans offer help for those who are attempting to stay ahead of the game. Personal loan consolidation is an attractive option when there are too many outstanding debts. After creating a household budget, the wise money manager will evaluate the best strategy for early debt repayment. One loan payment each month could solve the long-term debt issue. Careful planning is required to optimize the impact of the personal consolidation loan.
Personal Debt Consolidation Loans Explained
Funds secured through personal debt consolidation loans are used to repay other outstanding loans. Credit card balances, auto loans and student loans can be repaid with the money borrowed in the personal loan debt consolidation. All outstanding balances are repaid in full without negotiating a lower payoff amount. Creditors receive a lump-sum payment from the debtor.
Personal consolidation loans are not the same as debt settlement plans, which are designed to reduce the amount of money paid to the creditor. Revolving accounts are repaid and are closed at the borrower’s discretion. Some people choose to close the accounts to avoid using them in the future. Use of credit must stop to gain the full benefit of personal loan consolidation. Those who continue to use credit will require another consolidation loan in the future. This is not the optimal result.
Personal Loan Consolidation Options
Savvy money managers will conduct extensive research in the quest to address a personal debt problem. A tailored approach will consist of multiple facets to address each type of outstanding debt. Reducing the amount of interest paid each month on all outstanding debt is the primary objective of the personal loan debt consolidation effort.
- Utilize low-interest credit cards – A credit card account that charges zero percent interest should be used to consolidate smaller credit card balances. The strategy must include an actual amount of money that can be paid each month to repay the balance in less than one year.
- Home Equity Line of Credit – or HELOC – Anyone who owns a home can speak with the existing mortgage holder about a home equity line of credit. Low interest rates make this option important for the person who is juggling too many outstanding debts.
- Lending Club – Peer to peer lending offers access to loans when traditional lending options are unavailable. A large number of people offer to loan a small amount of money to the individual. The loan is repaid through on-time payments. This option will work if the borrower creates a detailed household budget.
Reasons to Use Persona Debt Consolidation Loans
Previous financial decisions can plague the individual with dreams of owning a business or purchasing property. Personal debt consolidation loans play an important role in preparing for future ventures. Advantages to debt consolidation are optimized when the money manager reduces discretionary expenditures and maximizes loan repayment efforts.
- Lower Monthly Payments – One loan payment will be lower than multiple payments since the interest rate is lower. For example, three loans requiring a $100 per month payment on each could be replaced with a $200 payment on the consolidation loan. Actual calculations must be performed prior to signing loan agreements.
- Faster Debt Repayment – Payments that are larger than the required monthly payment will accelerate the repayment of the consolidation loan. Redirecting funds from discretionary expenses will repay the loan quickly. Progress toward the goal provides the motivation to continue on the quest to restrain spending and repay the loan.
- Healthier Credit History – Debt ratios are calculated to determine the risk of default on all outstanding debts. Consumers can raise the credit score by lowering the debt load. The higher credit score opens doors for future financial goal achievement.
General Rules for Personal Consolidation Loans
Lending options that are advertised repetitively draw attention from consumers in desperate financial situations. Basic rules must be followed to avoid making the current situation worse. Each person has a different need for personal loan debt consolidation, and every approach should consider these rules.
- Do compare interest rates from many different lenders.
- Do calculate the actual interest charges, fees and other costs associated with a personal consolidation loan.
- Do request a personal credit report with scores prior to filling out loan applications.
- Do request corrections to the credit report to secure the lowest interest rates.
- Never accept the first loan offered.
- Never repay loans with lower interest rates than the consolidation loan.
- Never borrower more money than is necessary to repay the existing debts.
- Never incur additional debt while attempting to repay a personal consolidation loan.
Personal Loan Consolidation with Bad Credit
Consumers build a personal credit history over many years of repaying outstanding debts. High credit scores are rewarded with lower interest rates on credit cards, personal loans and auto loans. Changes in personal income can cause the consumer to incur more debt and miss monthly payments. These missteps place negative marks on the credit history that indicate risk of non-payment to lenders. Personal consolidations loans are possible when the applicant has less-than-perfect credit.
High Interest Rates
A personal consolidation loan might be approved with a higher interest rate for the consumer with a low credit score. This practice offsets the risk of default for the lender since more money is paid each month. The applicant must beware of high-interest loans since paying more interest will not accelerate debt repayment. Correcting the credit issue in the coming months should take be a higher priority than securing more debt. The borrower is wise to repair mistakes on the credit history and establishing a healthy repayment record.
Personal Loan Debt Consolidation Scams
Unfortunately, scammers know that people seeking debt relief are in desperate need of assistance. Advertisements will appeal to the fear debtors feel each day. Threats are listed in the text to enhance the fear. The offer includes answers to every concern with promises of the best outcome for the person who acts today. An immediate decision is required, or the offer will not be available.
The borrower must beware of the most frequent scam. Offers for credit from obscure sources should alert the borrower to do some investigation. Emails received should be investigated through trusted organizations, such as the Better Business Bureau. A non-existent entity in the BBB database should not be contacted. All financial institutions will be listed in the state licensing database.
Common Debt Consolidation Scams
Unscrupulous debt consolidation companies will offer remarkable interest rates and no fees. The borrower will make payments, but the creditors will begin to call and ask why the monthly payment is late. Confused, the borrower will try to make contact with the debt consolidation firm. Excuses are given, and the borrower begins to wonder what is happening.
The truth surfaces when the creditors turn the accounts over to collection agencies. This false consolidation loan provider is keeping the payments sent by the borrower instead of paying off the lenders. The borrower has been the victim of a very expensive scam.
How to Validate the Lender
Reputation is important for lending institutions. Anyone seeking personal debt consolidation loans will investigate each lender carefully prior to signing a loan agreement. Extreme bargains should be avoided at all cost since most offers that appear to be too good to be true usually are false. Scrutiny is paramount as the applicant looks to credible sources to find out more about each lender. Direct contact with the lender is essential. Websites and emails can be falsified, so the applicant must use the phone in addition to other contact methods.
- Better Business Bureau
- International Assocaition of Professional Debt Arbitrators – IAPDA
- U.S. Chamber of Commerce
- American Fair Credit Council
How To Get Started
Successful use of a personal consolidation loan must be preceded by the creation of a household budget. Evaluation of the past six months of expenditures will provide the framework for the family budget. Every dollar must fall into a category without creating a “miscellaneous” category. Control over the household income allows the money manager to embark on a quest to repay all outstanding debts.
Once the budget is created, the discretionary expenses must be scrutinized. Reducing the monthly obligations provides the framework for improving the situation and achieving the desired result. All use of credit must cease to support the objective: repaying all outstanding debts.
Fast action is the primary cause of poor decisions when the financial manager feels a sense of immediacy to solve the debt problem. Questions directed to a trusted person can help the individual to find the right approach to solve the family’s problem. Fewer mistakes will be made when the actual situation has been evaluated through the budgetary process. Actual dollar amounts are important in the pursuit of the right type of loan. Approaches that include multiple phases will allow the household manager to see progress and gather important facts prior to making decisions. Research provides insight and supports informed decisions about personal consolidation loans.