Do you have multiple credit streams and struggle to keep track of them? Then, maybe you have taken a lot of loans. Taking a loan is nothing bad. Many people take a loan. But it gets troublesome when you forget to keep track of them, and the bills just keep popping up at the end of the billing cycle.
It is a common problem that many people face. After all, we are still humans and have our desires for which we may take a lot of loans. But often forget to keep track of it. And this is the time when you may need a debt consolidation loan. In this blog, we’re going to discuss everything you need to know about debt consolidation loan and how it works.
What is debt consolidation?
Debt consolidation refers to combining all your loans into a single loan, including online and student loans and instant online loans in Canada. For example, you can take a personal loan to consolidate all your loans if you are struggling with too many credit lines. Likewise, you can combine all the open credits into one.
Debt consolidation doesn’t mean mixing your current loans but taking another loan that pays all your current loans and gives you a new interest rate and credit tenure. For example, a person has a credit card loan of $1000, an education loan of $3000, and a car loan of $2000.
All these loans are different and have their own interest rate. As all your previous loans are paid, you can now focus on your new loan. And as it is a new loan, you also have a new interest rate for your loan.
Advantages of Debt consolidation loan
Save money
Saving money is the main aim of debt reduction. Therefore, you should consider reducing your interest payments while assessing your debt consolidation alternatives, whether settling for a lower interest rate or a shorter payback period.
If you are approved for a balance-transfer credit card with a 0% APR introductory rate, you may be able to pay off your debt with no interest. But you’d have to pay back your debt throughout the initial term, which can run up to 18 months. After the introductory time, interest will be applied to any unpaid debt.
If you are approved for lower interest rate than what you’re presently paying on your debt, using a personal or home equity loan to consolidate your debt can help you pay it off more quickly and save interest.
Better Budget management
Debt consolidation loans can help you better manage your finance. In our life, no matter what you want to improve, simply start tracking it. One of the fundamental ways to improve anything in our life is to start tracking it.
So, in the case of money, start tracking your finances. Check where your money is coming from, where it is going, and what liabilities you own in your different credit lines.
It gets difficult to track and manage them, so debt consolidation loans help you streamline all credit and make it easy for you to keep track of your expenses.
New Debt timeline
When you apply for a new loan, you will have a new loan tenure and must pay according to a new tenure date. You can choose a tenure period for your loan repayment.
If you had a short tenure in previous loans and were paying a significant amount towards your loan, then a new loan can give you a longer tenure at a lower monthly payment.
A new timeline for your loan can help you significantly in your daily life. But before you increase your credit tenure, consider checking the loan interest charged on your loan. And choose a tenure that neither levy a lot of interest nor is difficult to pay in monthly installments.
Improve credit score in the long run
Your ability to make timely payments is reflected in your credit score, although this number isn’t only based on your payment history. Credit reporting agencies heavily consider your credit usage ratio, or how much of your available revolving credit you utilize, as another factor. Your credit use may account for up to 30% of your credit score.
You should maintain low credit utilization to prevent damaging effects on your credit. By paying off your present debt and consolidating it with a personal loan or balance-transfer card, you may be able to obtain new credit opportunities while also reducing your credit utilization and maybe raising your credit score.
Disadvantages of Debt Consolidation loan
After talking about the advantages of debt consolidation loans, it is also important to learn about the disadvantages of the debt consolidation loan to be aware of everything and take a thoughtful decision.
Affect credit score
A hard inquiry occurs when you apply for a credit card or debt consolidation loan will cause a 5–10 point decline in your score. But if you pay off your debt timely, debt consolidation can help you in the long run and make a positive shift in your credit score.
Volatile deals
Depending on your credit, income, and other variables, you might not be eligible for a loan or credit card with a rate lower than the annual percentage rates (APRs) on your current loans. Additionally, you might not be able to obtain enough financing to settle all of your current debt.
Fees
Origination fees for debt consolidation loans can range from 2% to 8% of the loan amount. Credit cards with balance transfers have 3% to 5% transfer fees possible.
May lose collateral
The lender will seize the collateral you pledged to open the loan if you consolidate with a secured loan and are unable to pay back the loan.
Higher credit utilization
Your credit usage ratio can increase if you consolidate using a credit card or another line of credit. As a result, your credit score may fluctuate. However, as loans are not revolving around credit accounts, they do not contribute to credit utilization.
A debt consolidation loan can be a huge relief if you get it at a good price; otherwise, it can also be a burden. So, this is all about the debt consolidation loan. So, with this information now, you can choose a reputed debt consolidation loan provider and get a loan to streamline your liabilities.
If you need emergency funds, you can always count on PrestoCash, as we have a simple online loan application in Canada.