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Debt consolidation loans are based on a simple premise; borrow a large amount to repay creditors so that only one is left and one monthly payment only. If unsure of being able to make monthly payment to creditors, applying for a debt consolidation loan is one of your options.
Monthly payment is likely to be lower than your current rate but the repayment period is much longer. Before opting for a debt consolidation loan, consider a few facts.
Always get a settlement figure from lenders instead of a balance, due to the occasional penalties and charges for early completion of credit agreement. Or else you may find the borrowed amount insufficient for repaying all debts completely.
When you discover the exact amount you owe and the cost of the debt consolidation loan, take your time in planning a realistic income and expenditure figure even if you can?t afford the new payments. Include a figure for emergencies. If the figures still do not add up, it might be a form of debt management plan that you should consider.
Types of debt consolidation loan available
Debt consolidation loans have different ways of operating. An unsecured loan from your bank or building society is one option. The advantage here is that your home or property is not secured against the loan and in no danger in case of your failure to comply with the terms. The disadvantage is the higher interest rate compared to a secured loan.
Many companies offer secured loans at competitive rates. Though your monthly outgoings are further reduced, your property is secured against the loan. In case of default in payment, the lender can get your property repossessed. Otherwise you can re-mortgage your property and free some of the equity in your house.
The advantage of this is that you will be paying a lower rate of interest, probably the same as your mortgage rate. The disadvantages are that although the interest rate maybe lower you will probably be paying the loan over the same period as your mortgage so overall you will be paying more. Also your home will be at risk should you default on the payments.
The Fair Credit Reporting Act
The Federal Trade Commission (FTC) imposes credit laws to secure your right to obtain, use and maintain credit. It?s not a promise that every body will get credit. The credit laws, instead, secure your rights in making it mandatory for all businesses to ensure fair and equal opportunity to all consumers to get credit and resolve credit disputes over mistakes. A good credit report is vital as businesses study your credit history when evaluating applications for credit, insurance, employment and leases.
Your history dictates your present, especially in the credit business. According to your credit payment history, businesses may grant or deny you credit provided you get fair and equal treatment. At times certain circumstances cause credit problems. It could be a temporary income loss, ill health or even a computer error. Credit problem solutions take time and patience but don?t mean an ordeal. Your credit payment history is recorded in a file or reports, which are kept and sold by consumer reporting agencies CRA. Credit bureau is one of the better-known CRAs. Your credit record will be at the credit bureau if you ever availed of credit or charge account, personal loan, insurance or job. This record carries some information about your income, and at times even the source, debts and credit payment history. Any criminal activity, lawsuit, arrest or filing for bankruptcy is also mentioned.
Pros and Cons
The pros of a debt consolidation role include reduction of monthly payments. It helps in easing the pressure from multiple creditors with only one to deal with.
Among the cons of a debt consolidation loan, is a longer period of payments. Additional costs may be necessary for setting up the loan. With secured loan your property is at risk. Having only one creditor could also be a problem in case of difficulty in negotiations due to more problems in repayment.
If the loans you are consolidating have all their interest calculated in the beginning, you may actually be paying interest twice. One is the interest for the first loan and second, the interest for the consolidation.
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