A consolidation loan is a larger balance loan to pay off smaller balance debts, such as credit cards or small unsecured personal loans.
Consolidation loans help combine your debts into one payment.
Here are some of the main advantages of a consolidation loan:
-A key benefit is the convenience of making a single payment instead of making multiple smaller payments.
-In most situations, the single payment is smaller than the smaller combined payments.
-If you have a good credit rating, your interest rate can be much lower than that of credit cards.
-With the consolidation loan, you can decide how long you want to take to pay off the loan balance.
-It will help you stay on track with your budget and control your finances.
Some of the disadvantages of a consolidation loan are:
– If your credit score is not very good and your interest rate is high, the only way to lower your payment is to spread the payments over a longer period. When this happens, you will pay more interest unless you make additional payments and repay the loan earlier than the contract term. If you are able to make higher payments, check with the financial institution that there are no prepayment penalties.
-If the financial institution you get the loan from asks you to close all your revolving debts after consolidation, it can hurt your credit score because your credit capacity (total available credit) has been reduced and you often risk to lose old credit history. , which will impact your credit score.
-After consolidating, you may close some of your revolving accounts with high interest rates, smaller credit limits, or annual fees. You should keep the “old” credit cards. Much of your credit score depends on how old your credit history is, and closing a longer-term card account can affect your credit score. The longer your credit history with a lender or credit card company, the better.
And here are some ways to decide if a consolidation loan is right for you:
-Ideally, consumers can speak with a financial advisor. A financial adviser can help the consumer.
– Determine if a consolidation loan will work for the consumer.
– Decide which accounts can be closed if necessary.
-Make a repayment plan, in case they don’t qualify for a consolidation loan.
-Help consumers maintain or improve their credit score.
-The first place to look for a financial advisor is where you have an established banking relationship. If they don’t have one, you can check with your local credit union, Hawaii Community Assets, The National Foundation for Consumer Credit, Hawaii Home Ownership Center, to name a few.
For a consolidation loan, first apply with the financial institution they use for their day-to-day banking needs.
Here you have an established financial relationship.
If you are unable to get the consolidation loan, try a community credit union or local bank.
Other types of loans to consider, if you own a property with equity, you may want to consider applying for a home equity line of credit (HELOC), especially if you are consolidating a large amount, as you can spread the payments over a longer time horizon.