Everything You Need to Know About Debt Consolidation Loans

When you have high-interest rate debts, such as credit cards, it can be difficult to pay them off with traditional monthly payments. It becomes especially hard if you have high balances and are juggling multiple bills every month. A debt consolidation loan could be the solution you need.

This guide explains what a debt consolidation loan is, how it works, and everything else you need to know about consolidating your debt. If you have any questions, call Personal Loan Pro today at (844) 311-4984 to speak with a consolidation specialist. We’ll be happy to help!

What is a debt consolidation loan?

A debt consolidation loan is a personal loan that you use to pay off other existing debts that you have. This allows you to roll multiple bills into one affordable monthly payment. The primary goal of a consolidation loan is to lower the interest rate applied to the balance. That allows you to pay off the debt more efficiently, saving time and money.

How a debt consolidation loan works

1. You apply for an unsecured personal loan.
2. Once you are approved, the funds from the loan are disbursed to your bank account.
3. Then you use the money you receive to pay off your credit cards and other unsecured debts.
4. This leaves only the loan to pay off so you can become debt-free.

Types of debt you can consolidate

A debt consolidation loan can be used to consolidate almost any unsecured debt. This can include:

• Credit cards
• Store credit cards and in-store credit lines
• Unsecured Lines of Credit (LOCs)
• Unsecured personal loans
• Collection accounts
• Unpaid tax debt
• Arrears for child support or alimony
• Student loans

You can generally not consolidate secured debts, such as mortgage and car loans.

Pros and Cons of Debt Consolidation

Debt consolidation offers several advantages:

• One monthly payment for all your debt
• Fixed monthly payments
• A set payoff date for your debt
• A lower, fixed interest rate

However, there can be some drawbacks, depending on your financial situation:

• If you run up new credit card balances before you pay off the loan, you can end up with more debt instead of paying your debt off.
• Getting the low interest rate you need for the loan to be beneficial can be dependent on your credit score. However, your Personal Loan Pro may be able to help you find a lender willing to offer you a lower rate even if you have credit challenges.

Choosing the right term when you consolidate

When you get a debt consolidation loan, you will choose a term for the loan. This is the amount of time you have to repay the loan. Loan terms can range from 12 months to 60 months.

Choosing the right term is important because it will affect two key costs with your loan:

1. The monthly payment amount
2. The total cost to pay off your debt

If you choose a shorter term, the monthly payments will be higher, but the total costs will be lower. The opposite is true with a longer term; the monthly payments are lower, but the overall cost will be higher.

Before deciding on a term for your loan, review your budget carefully to determine the monthly payment you can comfortably afford. You want to choose a term that provides a payment that won’t stress your budget but will get you out of debt in the shortest time possible.

Understanding the cost of a debt consolidation loan

Getting out of debt will always come with a cost—even bankruptcy costs money to file. But in comparison with other solutions, a debt consolidation loan can be one of the most affordable ways you can get out of debt.

Debt consolidation loans have two costs you need to be aware of as you apply:

1. Fees 2. Interest charges

Fees

Some lenders will charge a loan origination fee for setting up your loan, although not all lenders charge this fee. It typically ranges from 0.5% to 8% of the amount borrowed. This fee is rolled into the loan amount and repaid with your regular loan payments.

There also may be other fees applied, such as a late fee if you do not make a payment by the set due date. Always make your payments on time to avoid this fee.

Also, read your loan agreement carefully to see if the loan will have any early repayment or prepayment fees. These fees may apply when you attempt to pay off the loan early. If possible, avoid loans that charge these types of fees.

Personal Loan Pro can connect you with lenders that keep fees low and provide favorable terms.

Interest charges

Your loan will have an annual interest rate, which can help you evaluate the yearly cost of your loan. For example, a $10,000 with a 5% annual interest rate would cost approximately $500 in interest charges over the first year of repayment.

This may seem high. However, compared to annual interest charges on the same amount on a credit card, these costs are relatively low. For example, if you have a credit card with a $10,000 and a 17% annual interest rate, the annual cost would be over $1,700.

Also, consider that a loan will allow you to pay off the balance much faster than minimum credit card payments. The total cost of a credit card with minimum payments would be roughly, $8,600. By contrast, the total cost of a 5-year loan would be roughly $1,325.

How Personal Loan Pro makes getting a debt consolidation loan easier

Personal Loan Pro's debt consolidation specialists are here to make getting a consolidation loan as easy as possible. First, we provide a free consultation to talk about your needs, budget, and goals. That way, we help you ensure that a loan is your best option for getting out of debt in the most efficient way possible.

We also work with a network of trusted Canadian lenders that offer flexible lending and approval terms. So, even if you have bad credit or a high amount of debt, we can help you find a lender so you can get approved at the right rates and terms.

If you still have questions about how debt consolidation works, please call (844) 311-4984 to speak with a consolidation specialist now. We’ll be happy to help!