Finance- How a Debt Consolidation Loan Works

Debt consolidation refers to a debt refinancing solution that involves using one loan to help you pay off multiple loans. Various consumers opt to consolidate their loans as an effective way of dealing with high levels of debt. The process makes it possible to secure a reduced interest rate that will cover the whole debt along with the convenience of focusing on a single loan.

Debt

Money that is owed to one entity by another entity is commonly known as debt and is usually subject to principal repayments as well as interest. Interest is determined by the creditor who charges the debtor a fee that is based on a percentage of the total sum of the principal on an annual basis. This percentage is the interest rate that is usually paid at monthly intervals.

Loans may be unsecured or secured with a form of collateral. Consumer debt ranges from credit card debt to mortgages. The amount of debt a person has can rapidly increase and reach a level that puts the debtor at risk of a financial crisis and bankruptcy.

Debt Consolidation

  • There are different options that are available for consumers who are overwhelmed by debt and these include debt consolidation. This is an option that enables the person to clear debts that are currently owed when they take out a new single loan. Most of the debt, particularly high interest loans can be repaid through another loan.
  • Various lending institutions offer consumers a debt consolidation loan. A key advantage of this refinancing solution for consumers is the lower interest rate. Repayment may be spread across a longer period. Debtors are issued with loans that help them repay outstanding debt while providing another loan on the lender’s new terms.
  • Consolidating several loans into new loans with single payments can help people lower their monthly costs, increase their cash flow, become more organized and ease the stress that arises from making numerous monthly payments.

Process

Consolidating debt effectively is a step by step process that ideally begins with making a list of all your loan balances. The list should also consist of the monthly payments for each loan and the interest rates. Consider the different consolidation options that you can choose from, which may be secured or unsecured loans.

You will be able to consolidate different debts into one loan and a single monthly payment. The goal is to qualify for a reduced interest rate for the entire loan in comparison the current interest rates. Regardless of the consolidation option that you select, the process is generally the same. Rather than numerous debt payments being made each month, you will only deal with one payment.

Conclusion

A primary objective when consolidating is to reduce the interest rate as much as you can. When you identify a suitable option for your needs, you can proceed to clear outstanding balances. If there is an extra amount of money that you are able to save every month, this will help you reach your savings target. People who are facing major financial challenges can consult debt specialists and lenders who will work with them and provide a viable solution.

10 Mistakes Consumers make when looking for Debt Consolidation Loans

If you are deeply in debt like most consumers, it is likely you are looking for the easiest way out of the rut. Of course no one likes to be in debt, but the economic environment has pushed more Americans into debt. While there are signs that the economy is improving, the reality on the ground is that most households are juggling myriad debts.

It is no wonder then that financial advisors have come up with innovative solutions to help debtors cope with their loans. Debt consolidation has been hailed as one of the best ways to manage debt and get back on track quickly. However, there are many phony agencies and companies that are now scamming desperate customers with the promise of wiping away their debt.

Every consumer would like to get a quick way to settle their debt and this has led to proliferation of online scams. If you are looking for a reliable way to handle your debt, consolidating your loans is the best solution.

To avoid getting ripped off, here are some mistakes to avoid when looking for a debt consolidation loan:

  1. Failure To Confirm How it Works

Most consumers look for solutions in a frenzy when things are really bad. Online scammers understand how desperate you are, and if you don’t know what you are looking for, you end up getting burnt. Debt consolidation entails bundling all your loans together to make it easier to handle the monthly repayments. The new loan will be repaid monthly and you will enjoy lower interest rates. Instead of repaying several creditors, you will now have just one to deal with.

  1. Falling for Debt Settlement Scams

All borrowers would like to wipe their debts in a few steps and this is what scam artists bank on. When you see an agency claiming it will help settle your debts in a few steps, run and don’t look back. Debt consolidation is not the same as debt settlement. You will repay your small loans and remain with one large repayment. There are no negotiations involved as opposed to debt settlement.

  1. Poor Research

If you want to get out of debt safely, make sure you research the options available and the debt consolidation service to use. Compare the different debt consolidation solutions including the secured and unsecured loans, debt management, debt settlement, bankruptcy, among other debt solutions. More importantly, take time to compare myriad debt relief options available to avoid falling for a scam.

  1. Not Seeking a Second Opinion

When it comes to making financial decisions, nobody wants to be told they are wrong. However, the truth is that most people make emotional decisions while a second opinion would have helped them. If you are looking for a debt consolidation loan, talk to a trusted independent source. If possible seek references from people you trust before choosing any debt consolidation program.

  1. Failure to Leverage Online Reviews

A simple Google search is enough to help you identify a scam from a mile away. Take time to read reviews and testimonials from other users.  If there are any complaints regarding the company you want to use, keep looking. Consumers rapidly share information online making it easier to spot a scam from a   mile away.

  1. Failure to Check with BBB

The Better Business Bureau (BBB) is a treasure trove for anyone researching a debt consolidation scam. A simple search on BBB shows you how many complaints the company has and if they were resolved. The company’s rating will also help you determine the level of service to expect. If the company has unresolved complaints, keep looking.

  1. Failure to Compare Rates

It is understandable that you are in a rush to consolidate your loans, but maybe a little more research will help you find better rates in the market. Your bank might not be the best place to look for such a loan because they might not even have the product. If you have a loan with them or if you have poor credit rating you better look for credit agencies that will provide a tailored loan product.

  1. Don’t Read the Terms and Conditions

Now that you have found the right lender based on their rates what else could go wrong? Well, many things can because the details in the contract might negate any of the benefits you had thought about the company. Make sure to check each of the details and if you have any queries get your loan assistant to explain. It is important to understand that debt consolidation is supposed to enable you to enjoy lower interest rates but if there are hidden charges in the T&C, you will still remain in a financial pickle.

  1. Don’t Talk to Your Creditors

If you are considering consolidating your debt, make sure you first talk to your creditors and confirm any charges that might be involved in case you repay all your debt. More importantly, confirm whether they will work with your debt consolidation company. If you don’t talk to your creditor you might be surprised to realize months later that they are still charging you though you repaid their loan.

  1. Don’t Bargain for a Better Rate

If you are looking for a way to manage your spiraling debt, consolidating all loans is a good decision but you must confirm about the rate. Take time to do the math and bargain for a better rate in order to leverage the benefits of loan consolidation.

If you want to avoid a debt consolidation scam, make sure you take time to research and always seek another opinion. If a company seems to pressure you into agreeing to a loan without first assessing your needs it is likely they want to rip you off. Make sure your creditors know about the plan to work with the debt consolidation company and take time to read the fine details of the contract. More importantly, compare as many companies as possible in order to find the best interest rate for the debt consolidation loan.

Huge debt burden?

Question by nomoredrama: Huge debt burden?
I am about to graduate with a bachelor’s in finance from a pretty good school but I’ve racked up about 70k worth of debt. I’ve estimated that my starting salary will only be about 45k-50k. Is there anyone else out there in the same predicament? How are you handling this? What’s my best path to relieve myself of this burden? Also, I would like to go to graduate school someday but I’m afraid if I add that on top of my current debt I’ll drown.

Best answer:

Answer by Anonymousgirl
Oh I’m in your boat. I think right now what you need to consider are a few options.

1. Consider getting your loans consolidated. If you loans were all from federal aid, it’s possible to get them all lumped into one loan with a better interest rate, and then make a payment plan with them.

2. If you have private loans, consider consolidating them as well if possible.

3. Start looking for cheap housing. Free up as much money as possible before you graduate. If you look into renting for 300-400 a month, all utilities included, you’ll be able to set up a budget every month to determine what is needed for bills/necessities, savings, and loan payments.

4. Work a couple of years before going to grad school. That’s what I’m doing. In fact (this is a very important part) so many people fly straight into grad school incurring more debt that they fail to realize that there are some employers who will PAY for you to go to grad school. As long as you are okay with going to the school they pick, they pay for your tuition, fees, and books (as long as your grades are high). During this time, they may ask that you work there for 1 0r 2 years before going to grad school.

What I am going to be doing is working a lot before I graduate and save. I’m already putting in money into a savings every month to help pay for my loans 2 years from now when the first bill comes. I’ve also cut my expenses down by getting a job that is closer to home (cuts on gas), I pay less in rent, and I got a higher paying job. All of those things allowed me to save on 350 every month.

Also, consider sitting down with a financial advisor who will do a free consultation. Explain your concerns and then you’ll be able to come up with a reasonable plan to help pay off your loans in 5-7 years (yes it IS possible) and still save money. Talk to your loan companies and see if they will be willing to work with you as well.

What do you think? Answer below!

Debt collection scam?

Question by intellectual dude: Debt collection scam?
I used to have a lot of debts so I took a break from my college career to work and deal with all those debts, so in 2004 I got a job and in 2005 I paid all the debt collection agencies to settle my accounts and all the phone calls and mailings stopped.

Then this year from out of the blue, I got two letters from two different debt collecting agencies asking me if I wanted to settle. I thought this can’t be right because I already settled all my debts in 2005. Why am I being contacted now, when everything was quiet since 2005 when I settled all my debts? Is this a scam?
One is for a bank account, another for a store card.

Best answer:

Answer by redhairedmama75
For starters are you 100% sure that everything was settled?

You didn’t forget anything?

Give your answer to this question below!

drowning in education debt?

Question by Jenny: drowning in education debt?
I am a 25yo in Philadelphia, PA. I make 80k/ year. I paid for all of my education on my own and I owe almost 200K in student loans (yes, I worked through most of college and I chose to go to private schools.) My monthly payments are around $ 1300/mo and I am barely paying down my principal, I am barely saving anything for retirement (about 2% into a 401K), I am trying to get married and buy a house this year with my fiancee’ for the tax credit. Any tips on what to do with the student loans? I tried to consolidate, but it seems as if NO companies will do that anymore for private loans, which make up about 2/3 of my education debt. I don’t understand why someone like myself with excellent credit and a good job can’t consolidate? How do I plan for retirement and start saving? Any advice will be greatly appreciated. THANKS!

Best answer:

Answer by my underwear
Man, you sure got a plate full. Start paying off bills and saving money

Know better? Leave your own answer in the comments!

Aren’t you worried that Obamacare will drown the USA in debt?

Question by : Aren’t you worried that Obamacare will drown the USA in debt?
They national debt as of right now sucks.

The CBO (Congressional Budget Office) has estimated that over a 10 year span the bill will cost roughly around $ 1.2 trillion dollars, with money that we DON’T HAVE. Our children, grandchildren, and great grandchildren will suffer the consequences of having to pay back this bill. So is it really worth it?

Best answer:

Answer by Festus
I’m sure it will if it is not repealed.

What do you think? Answer below!