Debts are greater threats to any individual and if not repaid promptly, it may take away the light from ones life. Wise men rightly said, “A sick man sleeps, but not a debtor”. Creditors need to get their payment back and they may take any stringent actions against the defaulters and those who are not prompt in the repayment. The ongoing credit crisis and the downturn economy have left millions of souls with no jobs and this added fuel to the fire. Many have taken car loan, housing loan, business loan and other personal loans. There could be many difficulties leading to such loans but most of the borrowers are helpless with the mounting financial crisis. Certainly everybody wants to be debt free. When having more than one loan and not able to repay, debt consolidation loan seems to be a favorite one to restore normalcy in life.
This term refers to the act of getting one loan to repay all the other loans and stay with the single loan. This should be planned accordingly so that the new monthly payment will be accommodated within the monthly budget. This will surely take away the stress from the individual and will enable them to pocket cash safely. Else, the regular defaults will lead to late fees in the form of interest. Debt consolidation loan will make the individuals hassle free and get them out of the troubled waters. Here are advantages and disadvantages of these kinds of loans.
. Frequent numbers of defaults might lead to bankruptcy. This will drastically affect the credit report of the individuals. He will not be eligible for major funding in the near future. Consolidation loans can help in to stay away from bankruptcy and obtain fresh loans to repay all the existing loans.
. Usually debt consolidation loans come as secured loans. Hence, they can be obtained at lower interest rates. It is highly recommended to get such loans and repay all unsecured loans.
. It is convenient to have a single loan with a single lender rather than multiple loans.
. The amount of monthly installments will fit in the budget and the monthly bills can be paid promptly.
. The individuals can obtain tax benefits for the interest amount paid for the debt consolidation loans.
. The tenure for a consolidated loan is usually higher than the unsecured loans. Hence, the borrowers end up paying higher amount of interest.
. These are generally secured loan. If the borrowers fail to repay the amount, the property might be seized for the loan amount.
. This will have a short term impact in the credit history.
Different Types of Loan:
There are basically 2 types of loans available. They are secured and unsecured loan. Secured loans will carry lesser interest rates as they require collateral security. By this way, any property has to be mortgaged to secure the loan. In case if the house is mortgaged, borrowers can use the home equity loan to consolidate the debt. The term home equity refers to the value of the home subtracted from the unpaid mortgage balance. However, a personal debt consolidation loan can also be obtained. The borrowers must be aware of the high rate of interests in the unsecured loans which may defeat the purpose of consolidating the loan.
An unsecured loan is obtained at a higher interest rate. However, the borrowers do not take any risk by pledging their property. Any individuals who do not have any property can obtain this kind of loan. The reduced monthly payments could improve the cash flow for the borrowers helping them to meet the monthly expenditure. The borrowers do not have to feel the pinch because of mounting payments. This loan amount will extend for a longer tenure than the normal loans.
Debt consolidation loans help them to improve the credit score gradually. To save money in these kinds of loan, borrowers are expected to repay the loan amount as soon as possible. By this way, they can improve the credit score and also save some cash without paying larger interest amount. An important key to be successful is to follow the discipline. This is a solution to come out of all the debt problems and not a cure in itself. The borrowers must avoid over spending and should carefully maintain the credit score. Debt consolidation can greatly change the life of individuals with proper cash flow and solutions for financial hiccups.