If you are sick and tired of worrying about your debts, it may be time you considered a new debt repayment method. There are several ways you can manage the repayment of your existing debts, but not all of them may be suitable for you. If you want to avoid missing repayments of your debt, then it would be a good idea for you to consolidate all of them into a single loan. Debt consolidation loans are among the most popular and widely used management strategies. Many people go for loans because they can make the repayment of multiple debts very affordable and manageable. If you have never used a consolidation loan, you may be very curious how they work.
The Theory Behind Consolidation
So how do consolidation loans work? It is simple. They are meant to help financially burdened people to manage the repayment of numerous debts by rolling all their loans into a single one. For many people, dealing with just one creditor is easier than having to worry about paying multiple creditors. Also, by consolidating multiple loans you are more likely to get low interest rates and lower monthly payments. Plus, debt consolidation firms can negotiate with your creditors to eliminate late charges on your debts. This is a great opportunity for you to reduce the amount you need to pay off every month.
Where To Apply for Consolidation Loans
Most of the time, debt consolidation is necessary for the payment of student loans or credit card debts, but this can also be effective in dealing with many other forms of debt. Thus, you can also apply for debt consolidation loans from several different companies or lenders, such as:
- Credit counseling agencies
- Peer to peer lenders
- Credit card companies
- Mortgage companies
Many consumers opt to apply for consolidation loans from their mortgage lenders by using their home equity as collateral. In comparison to other kinds of consolidation loans, home equity loans offer lower interest rates and longer repayment periods. This is mainly because the borrowers who are approved have an asset to put up as collateral. This is a kind of dangerous for borrowers, though, because they are taking the risk of losing their homes in case they fail to pay back their lenders. On the other hand, consolidation loans that require no security are available as well, but they come with huge interest rates.
Do They Affect Your Credit?
Debt consolidation loans do not have an immediate impact on your credit score. In view of the fact that the loan processing involves a thorough credit check on you, you can expect your score to go down a few notches. Another thing you should be careful of if you do not want your credit score to go lower will be your willigness to repay your debt on time. You have to make sure you make your monthly payments on time as this could even help you build your credit score. This, in short, is how debt consolidation loans work.