Many of the world’s population is not in the elite club of people with very high incomes. They live a middle-class lifestyle and struggle to meet their expenses. Many choose to kill their dreams because of the lack of finance and continue their lives, but many take the other path. They take debts/loans to fulfil their desires and expenses from various resources and sometimes have too many lenders to pay, making it difficult for them to pay the debts on time. Here comes the role and importance of Debt Consolidation Loans.
What are debt consolidation loans?
These types of loans merge or consolidate the multiple loans of the customer into a single account to ease the process of repayment for the various loans/debts taken by the customer from different places.
These loans are different from the usual personal loan because, in personal loans, the amount availed by the borrower can be used in any manner as per the need and will of the customer. However, in consolidation loans, the money is used to pay off the other debt and then combine them into a single account. Sometimes, the lender does not hand over the money to the customer who avails the loan but directly pays the customer’s debts.
Pros and Cons of consolidation loans
Consolidation loans appear a good deal in a broad picture, but there are always two sides to a coin. Similarly, there are some advantages and disadvantages of consolidation loans as well, which are:
- Lower Interest Rates – Consolidation loans offer potentially lower rates than the other personal loan rates making it easier for the borrower to repay the loan quickly without much difficulty.
- Easy to manage – Paying a single loan instead of multiple loans becomes much easier for the borrower/customer to pay.
- Reduced monthly Payment – The customer’s monthly payment gets diminished as the debts are now distributed in a different plan, which might be for a longer time, reducing the number of monthly instalments the customer pays.
- Streamline the finances – Consolidating multiple loans into a single loan helps the borrower reduce the number of payments made in a month, reducing the interest paid by the borrower to the different lenders at varied rates.
- Helps in paying debt earlier – Consolidating multiple debts under a single account can lower your interest rates compared to interest paid to the individual lenders. The money saved compared to earlier can be added in the instalments to pay the debt earlier.
- Added costs – Some lenders charge additional fees in the form of origination fees, balance transfer fees, etc. Before choosing a lender, the borrower should analyse all the expenses and the overall cost of the loan you will bear.
- High-interest plans – Consolidation loans can be a boon if the borrower qualifies for a lower interest plan. However, if the borrower’s credit score is not that high, it can add more burden from the higher interest rates than your present interest rates.
- Paying more in the long term – Another disadvantage of Debt Consolidation Loans is that they reduce the monthly payment quickly. Still, it makes the customer pay more than the ideal amount because of the interest charges for a more extended period.
- Don’t address the core issue – Consolidating loans mainly helps simplify the repayment of the loans. Still, it does not address the underlying problem of bad financial habits, which in the first place led to so many debts making them challenging to pay on time and manage appropriately.