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Your Guide to Debt Consolidation Loans and Their Alternatives

Your Guide to Debt Consolidation Loans and Their Alternatives

Have you been thinking about taking out a debt consolidation loan to get out of debt? It can be an effective way to reduce the total costs of debt and put on a clear path to financial freedom. But you should know what you’re getting into before you start applying. Applications for a new loan can affect your credit.

With this guide on debt consolidation loans, you’ll walk away with a clearer understanding of what they are, how they can help, whether they’re right for your situation, and what alternatives exist. 

What Is a Debt Consolidation Loan?

It’s a loan that you take out in order to pay off numerous other small, typically high-interest loans, such as credit card balances, payday loans, or outstanding utilities. You can apply for one through your bank or credit union, and they tend to offer the best rates. They may also be available from second-tier lenders, but at higher interest rates, so beware. 

What Are the Advantages?

What’s the point of borrowing money just to pay off other debts? If you do it right, there are a lot of advantages to a debt consolidation loan:

  • You simplify your finances, only making a single monthly payment. This reduces stress and the likelihood that you might just forget to pay a bill (it happens to the best of us).
  • Lower interest rates make the new loan cheaper than paying off the old ones.
  • With lower interest rates, you can pay it all off sooner, starting your debt-free life sooner.

What Are the Alternatives?

There are several reasons why a consolidation loan might not be your best option:

  • The lender may require collateral – property or other assets that they can collect if you default on your payments – or a co-signer that you don’t have.
  • Your credit score is too low, and as a result, a top-tier lender who can offer a worthwhile interest rate won’t approve the loan. Lenders will base their interest rates on their evaluation of your risk level, which is where your credit score comes into consideration.
  • The interest rate offered to you is too high, which can hurt your financial progress more than help. Any rate higher than the interest rates you’re already paying is too high.

Whether a debt consolidation loan is inaccessible or it will do more harm than good, a great alternative is a Debt Consolidation Program. Rather than borrow the money, a certified Credit Counsellor from a non-profit credit counselling agency negotiates a new, lower payment plan with your creditors, including relief from interest charges. Then, you make one easy payment to the non-profit credit counselling agency who distributes it to your creditors on your behalf.

It offers all the benefits of a loan, like lower interest and a single monthly payment, without requiring you to borrow more money.

Debt consolidation loans can be effective, but they’re not accessible or right for everyone. Find the right way to get out of debt fast for you.

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