You had an emergency at home that you need to get a credit card or apply for a personal loan. Everything went well until you’ve maxed out your credit card and you applied for another loan after the other.
It happens every few months and long before you know it, you’re already swimming in debt that you’re already drowning from it.
Some say that you should get another personal loan so you can pay the first one but that is impossible. That is not good and that will definitely put you on collections.
On the other side, there are debt consolidation loans. This combines all unsecured debt into a single loan and monthly payment.
There are different advantages that you can enjoy when you take out a debt consolidation loan. Such as lower interest rate, credit protection, lower monthly payments, and best of all – you can get out of your debt as fast as you say yes to your fiance.
But of course, there are risks a well.
What are the types of debt consolidation loans?
The two types of debt consolidation loans are secured and unsecured.
Secured loans require collateral such as cars, mortgages, and anything that is highly valuable to the borrower. Something that can pay off the loan if the borrower failed to do so.
While unsecured loans don’t require collateral however, they are harder to get approved because most borrowers don’t have great to excellent credit score.
Since you are going to use the debt consolidation loan to pay off your current loans, there are things you have to consider before signing any agreement or taking out a loan.
Here are the 4 Major Debt Consolidation qualifications before you get approved:
- Proof of income – lenders definitely want to know if you can meet the deadlines for payments
- Financial stability – lenders usually check your financial stability as this should resolve your current debts and be in a severe financial status is not a good sign to lend you another amount of money without making sure you can pay for it.
- Credit history – lenders will get a credit report and you need to make sure those are not showing any discrepancies that you cannot take off after they inspect it.
- Equity – if you’re applying for a larger loan, equity is needed such as home equity.
The above qualifications are required to get a debt consolidation loan.
But what are the risks of getting a debt consolidation loan?
It’s true that a debt consolidation loan is a big help when it comes to paying off your current loan and getting approved on lower interest rates. However, there are more dangers when you choose to apply for this type of loan. See what are the risks as follows:
Paying More Interest
You might ask, “You told us that there’s a benefit of paying lower interest rates when you chose to apply for a debt consolidation loan.” And yes, that is true. But ‘lower interest rate’ is not the sole factor in how much you’ll pay in the end.
You can definitely stretch your repayment period as long as you want and as long as the lender permits so that you can have a lower interest rate. But that also means that your total costs would be higher since you’re paying longer than usual.
You’ll End Up Going Deeper Into Debt
No one knows what will happen after you get approved for a consolidation loan. There are two things that might happen. First, you’ll be able to pay off all of your debts. Or second, you’ll get another loan to pay off your consolidation loan – and before you know it, you’re in a cycle of debts. And it will be a struggle to get off from it.
The key to avoiding this from happening again is to have a plan on how to not overspend. Make a budget. Make sure you’re not spending over that budget – and that you are saving.
Save before you make another purchase.
According to reputable lender Cash Mart Singapore, not all lenders are legitimate and would charge you the right interest rate. Sadly, most of these lenders are just marketing debt consolidation because they know a lot of people need help in paying off their existing loans.
We know that you don’t want to get caught up in scams so it’s better if you know how to research these companies and compare your choices in case you want to move forward.
Putting Your Home or Cars at Risk
In order to get a consolidation loan, you need to show collateral and that means that if you won’t be able to repay the lender, you’ll definitely say goodbye to your autos and houses. You don’t want that to happen, do you?
It is a nice way to pay off your debt all at once at a lower interest rate but you also need to know the debt consolidation risks that are tied with it. You don’t want to be forever in debt because you still want to enjoy your retirement age.
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