Personal Debt Consolidation Loan: Your choice for one installment instead of many .
The Concept of Personal Debt Consolidation Loan is ‘to take one loan to pay off several loans running simultaneously’. In this case, the amount of one loan is normally sufficient to clear off all the other simultaneously running loans.
Why Personal Debt Consolidation Loan
In case of having several loans running simultaneously,
the different loans may have different monthly payment
dates, which keeps the borrower under pressure throughout
the month. But in case of a debt consolidation loan,
it becomes quite easy to pay one installment once a
month. Next, the several individual loans become costly
in terms of interest charged whereas a personal loan
for debt consolidation comes at a lower interest rate.
So, the borrower saves due to lower interest rate.
In simple terms, a debt consolidation loan simply transforms a number of unsecured loans, like credit cards, into another unsecured loan. However, most commonly, a personal debt consolidation loan is lent as a secured loan, where in an asset is provided as collateral, normally a home. In this case the home is mortgaged. Due to this collateral, personal debt consolidation loans have cheaper interest rates, due to reduced risk for lender.
Then the total interest and the total cash payments towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. It has been seen that borrowers of personal debt consolidation loans are under credit card debts, who spend more than their earning. If this habit continues, even a personal debt consolidation loan cannot help after a certain extent.
A personal debt consolidation should be availed if someone is paying, for example, credit card debt. Credit card debt carries a much higher interest rate than even an unsecured loan from a bank. Consumers in debt who own property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash payments towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. Therefore, to summarize the above, a personal debt consolidation loan offers the following advantages:
- Reduce Monthly payments:
- Improve Credit Record
- Reduce the interest you pay
- One payment instead of several monthly payments
Eligibility for a personal debt consolidation loan
A lender checks the profile of prospective borrower
of debt consolidation loan before paying him the loan
amount. While checking the profile, lender looks at
various factors such as the current amount of outstanding
loans, credit history, source of income etc. if the
borrower has very bad credit history, lenders consider
only secured personal debt consolidation loans only
to reduce their risk of lending money to a person who
has a record of defaults in payments. In most of the
case, borrowers use their home as collateral.
Therefore, the key factors in evaluating a prospective
borrower of personal debt consolidation loans are:
- Amount required
- Credit History
- Payment duration
- Any collateral
- Source of Income etc.
There are lenders who accept even unsecured personal loans but in this case the loan amount remains quite low due to increased risk for lenders.
To conclude, a personal debt consolidation
loan is a type of loan which is borrowed to pay off
several other loans. In this case, usually, interest
rate is low, which reduces the cost of debt consolidation
loans compared to sum of several simultaneously running
loans.
