What is Loan Consolidation? 7 Benefits to Consolidating Your Loans
A consolidation loan is a financial product that you can use to combine your outstanding debts to repay them with one monthly payment. In most cases, this simplifies the debt repayment process. It can also save you money. Before signing the terms of a debt consolidation loan, be sure to research the loan to confirm that you’re getting the best deal. You’ll find great options from lenders like LendVia. Here are seven benefits to debt consolidation loans.
1. You May Pay Less
Often, when you consolidate your debt, you’ll be able to pay your total debt off more quickly. Making payments to several different lenders can be hard to track, potentially costing you late fees. Also, it’s likely that different loans have different interest rates.
A consolidation loan will have one payment, and it may come with a lower overall interest rate. For instance, if you owe $7,000 on a credit card that has an annual percentage rate, or APR, of 16% and you pay a minimum payment of $150, then you’ll pay around $11,000 for six years. However, if you consolidate this credit card balance into a consolidation loan that features an APR of 8% and made the same $150 payment, then you’d wind up paying $8,400 for around four and a half years. This saves you around $2,600 and more than a year of making payments.
Along with lowering your interest rate, you’ll be able to lock it in. Many financial institutions lend money to people under variable interest rate terms, which means that your rate fluctuates. With a consolidation loan, you’ll know how much your monthly payment will be, and this allows for better budgeting.
2. You’ll Have a Payoff Date
Consolidation loans come with an exact payoff date as long as you make all of your payments on time. These loans are usually for three or five years. When you’re researching your consolidation loan options, keep an eye out for ones that charge prepayment penalties. Most no longer require this added fee, but a few still charge consumers for paying early. If your consolidation loan doesn’t charge a prepayment penalty, it will be worth it to add extra money to your loan each month. That way, you can get out of debt even earlier.
3. You May Increase Your Credit Rating
Credit scores are based on different factors with some being more important than others. For instance, if you fail to make your payments on time, then this will negatively impact your payment history. Most credit reporting agencies consider this an important part of a person’s credit rating. Maxing out your credit cards can also harm your credit score. When determining a credit score, credit agencies look at your credit utilization rate. Consolidating debt using a loan may improve your credit score if doing so decreases your credit utilization and results in a better payment history.
4. Easy Application Process
Debt consolidation loans generally have an easy application process. Most financial institutions that offer consolidation loans let you apply online or over-the-phone. Plan to share personal information like your name, birthdate and social security number. You’ll also need to tell the lender how much you make in a year. The financial institution may ask you to verify your income by sharing your last two or three bank statements. You can do this by downloading them to your application.
5. May Help you Avoid Defaulting
When you go through the loan consolidation process, you may be able to decrease the monthly amount that you’re paying for your outstanding debts. If you’re straining to cover your monthly payments, then this decrease could help you avoid defaulting on your financial obligations. Defaults can be detrimental to your credit history. In fact, a default may impact your score for seven years.
6. Decreases Stress
While the main focus of a consolidation loan is financial assistance, getting one is likely to have an emotional effect because it can decrease your overall stress levels. Most people don’t function well when they are under too much stress. It may cause you to make poor decisions. For instance, after paying off a large debt, you may reward yourself with a shopping spree, placing yourself back into a debt situation. A better course of action is to avoid financial stress. A consolidation loan can do this since it simplifies your finances and gives you a specific payoff date.
7. More Breathing Room in the Budget
A loan consolidation could give you more breathing room in your monthly budget. It does this by decreasing the total amount that you’re paying each month. With a little more room, you might find it easier to stick to your budget. It also might be easier for you to add more to your consolidation payment, allowing you to pay the loan off more quickly.
Taking Control of Your Finances
If debt is starting to get the best of you, then it’s time to consider a debt consolidation loan. Benefits may include a lower interest rate, faster payoff terms and a better credit rating. This type of financial product can help you take control of your budget.