How do debt consolidation loans work?

By Angela Monroe - June 6, 2018

Managing multiple debts is always a challenge. A large number of people pile up different debts over time. There is nothing wrong with taking a debt, but managing multiple debts can be tricky.

If you are finding it difficult to manage different debts and you don’t see a path out of the red, you should consider a debt consolidation loan. With the help of a debt consolidation loan, you can bring all your existing debts together into a single repayment plan.

Whether or not a debt consolidation loan will suit you or not depends on your circumstances. Professional finance consultants can help you understand whether you should take up such a loan or not.

It is important to know what exactly a debt consolidation loans is before you start approaching lenders. Let’s take a closer look at these loans.

What is debt consolidation?

Debt consolidation is the process of obtaining a new loan to pay off many smaller existing loans, bills or debts. The biggest advantage offered by debt consolidation is that it allows you to bring all your debts into a single combined loan. You don’t need to bother about making multiple payments – you’ll only need to deal with a single repayment plan.

How do debt consolidation loans work?

Each separate loan that you have is essentially a separate contract with specific terms and interest rates that apply to it. To consolidate separate loan contracts, you need to apply for a sizeable loan and use the funds to pay off your existing creditors.

Interest rates of debt consolidation loans are usually on the higher side. This is because it is technically impossible to calculate a consolidated interest rate for all loans.

As you consolidate your debts, you will also free up your existing credit. While this is good, it does increase the chances of you piling up more debt. Make sure not to fall into this trap.

Why go for such loans?

There are many reasons why people go for debt consolidation. These include:

  • To simplify their finances
  • To outline a clear repayment schedule
  • To put an endpoint to debts
  • To reduce stress
  • To stop collection calls
  • To improve your credit score

Who should go for debt consolidation?

Whether or not you should choose to take out a debt consolidation loan depends on your individual circumstances. While debt consolidation may be a great option for some, it is not such a good option for others.

Here’s a brief guide to help you understand if you should take out a debt consolidation loan:

Financial condition Should you consolidate debt? Why
Your credit score is good enough Yes You may qualify for a low-interest loan
Your cash flow covers your existing repayments Yes Consolidating will make it easier to track cash flows
Your debt to income ratio is less than 50% Yes With a debt to income ratio of less than 50%, you may qualify for low-interest rates
You plan to keep your credit options open Yes Debt consolidation will help free up your credit options
You want to improve your credit score Yes If you are financially responsible, but you have a poor credit score due to past mistakes, debt consolidation can help improve your credit score
You have a poor credit score due to excessive spending habits No Debt consolidation will open up credit lines and increase chances of piling up new debt
You are overwhelmed by debt No When you’re already overwhelmed by debt, the best thing is to seek financial advice to get out of debt.
Your existing debt is small No If you can easily manage your existing debt, consolidating at higher interest rates makes no sense

Depending on your situation and your financial goals, consider whether you choose to take out a debt consolidation loan or not. If making the decision seems to be tricky, don’t hesitate to seek the advice of professional financial consultants. Professional finance consultants are well versed with the intricacies of all types of loans. Their expert advice will help you determine whether you need debt consolidation or not.

How to start the process of debt consolidation?

There are many ways to go about with debt consolidation. While you can approach banks and big lenders for debt consolidation, you can also approach smaller lenders.

You can consolidate your debt through a line of credit, through a finance company, through a bank or credit union, through a home equity loan, through credit card balance transfers and debt repayment programs.

Knowing how to go about consolidating debt is the first step to debt consolidation. To make your debt consolidation simple, efficient and effective, you should seek the advice of professional financial consultants.

Talk to an expert today

Before you apply for a debt consolidation loan, you should consider talking to an expert. Loans for People with Bad Credit is your best option when it comes to finding debt consolidation finance experts.

Our consultants have helped many people understand if they should go with debt consolidation or not. We have vast experience and expertise in understanding financial instruments, and our knowledge will definitely be of use to you.

To find out if you should go for a debt consolidation loan, talk to one of our expert consultants today!

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.


Office 365 Migration Support

June 9, 2018

Another very strong and powerful post I’ve read some of your previous posts and finally decided to drop a comment on this one. I signed up for your newsletter, so keep up the informative posts!

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Credit Mediation

September 12, 2018

There are more open doors for us to get into debt than ever before and it is true that there is nothing amiss with taking a debt. Thank you for the great advice and Keep up the enlightening posts!

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