Getting a low interest loan to remove the high interest debts seem like a logical and effective way to solve a debt problem. This is probably why people who have no knowledge of debt relief usually consider it first.
However, some financial experts do not think that it is wise to cover one debt with another. But if you are choosing between a multiple high interest debt and a single low interest one, you know who the winner will be.
There are pros and cons to using debt consolidation loan to as a debt solution but you have to consider your qualifications carefully. For one, there is no debt reduction here like in debt settlement. You need a steady income to be able to afford paying off everything that you owe. It pays to be well informed of your options and to help you get started, let us talk about the advantages of using a loan to get rid of your high interest credit obligations.
Advantages of a debt consolidation loan to pay off debt
In most cases, you will feel the full benefit of debt consolidation loan if you have the right qualifications. Allow us to identify them as they apply in our list below.
Low interest rate. This is one of your main goals in debt consolidation loan. You want to make sure that you get the lowest rate that you can to help lower your monthly payments. You need one of two qualifications for this. You need either a good credit score to avail of a low interest personal loan or a collateral for a secured loan. It pays to compare different rates so we strongly suggest that you do your research well. You can call one lender after another to inquire their rates. You can also visit websites like Bankrate that can compare mortgage-related rates and personal loan rates in your area.
Single payment scheme. When you apply for a loan and you get approved, you will pay off your multiple debts completely. This will leave you with only one loan to pay off every month. This will help you focus on other things – like growing your income to be able to put aside for your emergency fund.
Low monthly payment. The low interest will help you achieve a lower monthly payment requirement. This will help free up some of the funds so you can put it in your savings too.
Longer payment period. The low monthly contribution is also caused by the long payment period. Your current balance will be stretched over a longer term and that means you have to be able to sustain payments until you finish it. A steady and stable income is a must.
Does not damage your credit score. The great thing about this program is it will not damage your score. Although the high debt amount and the credit inquiry of your lender will reflect on your credit report, that will be temporary only. As you completely pay off your other debts with the loan amount, it will rise. And as you pay off your loan payments diligently, that will steadily increase your score too.
The whole purpose of debt consolidation loan is to give you a more structured payment scheme so you can monitor your contributions carefully.
Ensure that consolidating debts through a loan will work
If you are certain that you want to use this, you have to make sure that you can avoid the pitfalls that commonly make people fail at it. Here are some tips to make this debt relief program work.
Know the costs involved and be prepared for it. This is especially true if you will use a collateral to get a secured loan. You need to know the debt consolidation loan costs that you have to pay off. There are processing fees and other administrative expenses involved. For instance, the lender will have to pull out your credit report and that entails costs.
Keep your credit cards after payment. There is a great temptation to use your credit cards once you have paid it off. Make sure you will not succumb to it. You have not yet paid off what you owe. You only shifted it so you only have one lender to deal with. If you use your credit cards again, you will just increase your debt amount that it could keep you from debt freedom for a much longer time.
Save the extra money you have. Remember how the lower monthly payment can free up some funds? You need to use that to boost your savings. This will be part of your emergency fund so that any immediate need can be finances without you sacrificing the funds allotted for your debt payments.
Incorporate your debt payment into your budget. You have to make sure that your debt payment is placed in the priority list of your budget. That will keep you from forgetting to pay off what you owe.