This a is a scenario where a person decides to take another loan and settle other several loans that he or she has been paying. This helps to combine all loans into a single loan with a single payment per month. Most people use this technique to avoid penalties and being blacklisted by lenders or banks.
Types of debt consolidation
a) Debt consolidation loan that is secured- these are loans that are mostly given out by banks. They include serious procedures during application. They charge a lower rate of interests making it convenient for people who are seeking for a long-term loan payment
b) Debt consolidation loan that is not secured-these are loans offered online. The application procedure is simple and doesn’t require many requirements. Their approval is simple. The disadvantage of this form is that they offer loans with high interest making it difficult for most people to go for it.
The process of acquiring debt consolidation
Application. This is the first step in requesting the loan. You must borrow the loan through a written or going to the lender in person and explain what you intend to do with the money. They will ask you about your income salary, the properties you own or your business to check if you are capable of paying the loan.
Select a loan and payment plan. This will greatly affect the amount of loan to be allowed to take and the duration for paying the loan. The longer the time of payment the higher the interest rate the lender will give you.
Confirmation of the application. The bank or the lender will give you a written form not for loan approval but for you to check and confirm that the details you gave out are correct and that you accept the terms and conditions of their service.
Get the loan. Once the debt consolidation firm accepts your loan request, they can either give you the money directly through there account or they send the money through a check to your bank account.
Paying back. This is the process of giving back the money after they agreed time between you and the lender. Paying back the money includes the agreed interests. Failure to comply with the agreement may lead to penalties.
Factors to consider before choosing debt consolidating firm
Payback methods: One should choose a lender who has various payment forms. It should allow you to pay using your mobile phone so that you can pay for it wherever you are.it should have a good system that can do automatically deduct the agreed amount from your salary once it reflects in your bank account.it should allow you to change payment schedule whenever you don’t have enough money.
Overdue charges: Never choose a debt consolidation firm with heavy overdue penalties unless you are sure you will be able to make all payments as per the agreement. This is because the penalties can negatively affect your credit and loan history preventing in getting other loans in future.
Interest amount: Firms with lower interest are good for small loans. It will help you to pay less additional interest charges. Interest amounts usually depend on the payback period selected by the one taking the loan. The longer the period you choose the higher the interest amount and the shorter the period the lower the rate of interest you pay. The latter is the best for most individuals.
Your qualification for the loan: It is good to first figure out whether you are eligible to get the loan before going to the bank or the lender. This usually helps to avoid disappointment and depression from the lender after being denied the loan. Things to check include credit records, your salary and the net-worth of the properties and the businesses you own.
The legitimacy of the debt consolidation group: You must research on the best lender and check their record to confirm if they can be trusted. Some are scammers pretending to be debt consolidators and yet they are just thieves. You must check their documents if they are registered by the relevant authorities. You might get a company that gives you a loan with high-interest amount than even paying your loans on your own
Type of the firm: Recognized banks are good than any other lenders group. Banks have well-documented terms of service with average interest rates and well automated systems which can keep track of our loan payments. The systems are able to alert you through a message via emails or text messages when you delay repaying your loan
Available choices: Are you able to settle your loans with your salary? Then avoid debt consolidation. This is because you will be adding a fresh loan which might be cumbersome for you to finish repaying later. If your lenders can agree to give you some time to clear your loans then it is good for you to try your best instead of adding another debt
Size of the firm: There are both large and small companies offering debt consolidated loans. Basically, large companies are the best since they can offer any amount of loan. Large companies also have good records since they serve many people hence they are striving to shine and dominate the market.
Requirements for starting a debt consolidation firm
Confirm those who are doing the same business: Check on your competitors to see how they are investing in the business. Research on their business rules, regulation, and terms of service. Check on how they get customers. Research on their sources of funds and identify their funding firms.
Create friendship with banks and companies: Provide them with your documented terms of service, let them know that you are an accredited debt consolidator so that they can have confidence when negotiating for the customers.
Outline clear terms of service: You should come up with well-documented terms of service that is a bit fair for both you and your customer. You should offer services that favor those with debts to attract more customers. The services should not be too cheap to an extent of making your clients suspicious of your offers.
Have a brief target and plans: You should decide how much you are going to invest in your business, the number of employees you are going to work with, your target profits and the possibility of expanding your firm. This will greatly help in keeping records and monitoring business growth.
Read and understand the rules and standards of starting a debt consolidation business: Some countries have laws governing credit institutions and companies. Some are required to pay some amount for taxes. In some states, one must have all documents for running such business before accreditation of the firm.
Have enough funds to start the business: Before starting this business, you should ensure that you have enough money since involves several activities which require money.
Positive impacts of debt consolidation loans: It saves the interest rates. When you have several loans with different high-interest rates you can look for a consolidating loan with lower interest and clear the debts so that you can continue paying the consolidated loan balance with a lower interest layer hence saving the interest amount.
Good credit history: Paying the other loans using consolidating loan at a good time helps you build a good payment record hence increasing your chances of being awarded a good amount of loan when you request again. You will also be secured in case you need an emergency loan you can get it confidently from any of your lenders.
Increase your payment period: You can talk with the debt consolidation creditors to give you more time to pay your loan hence you will not be required to pay each month.
Improves the economic life of an individual: Some people make use of the money borrowed from debt consolidation companies to start multi million projects that boost their income and improves their living standards.
Negative impacts of debt consolidated loans
Increase in interest amount: Debt consolidation may increase your interest amount due to increasing payment periods which may involve more interest more than even the previous loans. It reduces the monthly payments but the interest charges may increase due to the long payment period.
It endangers your properties and businesses: Your properties can be taken away by the debt consolidating firm if you are unable to pay your debts. The companies usually request the person borrowing the money to secure his or her loan with some of the personal assets or belongings. When one failed to repay the money as agreed, the company comes for your property and sell it and you end up losing a lot
Chances of taking more debts are very high: When you use the borrowed consolidation debt to pay your existing loans, most people get temptation of going back and borrow again leaving themselves with unnecessary bulk loans which may cost them after some time. This will end up forming a cycle of loans hence the person may gradually become poor due to loan payments.
How can debt consolidation loans be used for;
Pay hospital bills-hospital bill is one of the vital emergency issues; Illness can hit anybody and it may require attention. In this scenario, debt consolidation can be sought and it can be of great help if it succeeds.
Using it to sort personal issues; sometimes you may want to settle some issues such as school fees because of some reasons. Some firms can allow to give you the loan as long as you meet their requirements and agreements.
Paying workers; sometimes you might be given a contract that you are paid after completing the project.in this case, you will be required to use your own money to pay your workers. If you do not have enough money, and you have other loans, you can seek help from one of the debt consolidation firm so that you may run your project smoothly.
What to do before applying for debt consolidation loan
Make a good payback plan: Once you get the money, you should budget on how you will pay back the money to your creditor to avoid charged for late payments.it will also keep your credit history awesome and you will be able to get loans from your creditors.
Research for a good company: You should research and even ask experts for the good lending company that will give you a good interest and a good payment plan. You should go for the one with the list interest rate to enable you to pay a reasonable amount back with ease without any collision between you and the company.
Avoid unregistered companies: Some companies are there to make easy money. They will lure you to subscribe to their expensive interest rates. Once you get any company claiming to offer consolidated loans, ask them to produce all documents registered with legal stamps. They should also be insured by a recognized insurance company
Make budgets keenly to avoid future loans: Debt consolidation will clear all existing loans and bills. This tends to convince people to g back for new loans thinking that they have cleared the previous loans.one should know how to make his or her budget to avoid adding other loans to avoid accumulating loans from various lenders.
Debt consolidation can be good for you if you are using the money to generate other projects that can provide money for paying back the borrowed money.
It is good to choose a firm with a lower interest rate to enable oneself payback the money in a shorter period.
Fake companies are emerging claiming to be legit companies but in the real sense they are there to add more debt to the struggling individuals so that they can go back to them to consolidate again
Debt consolidated does not reduce your debt but instead, it clears the prior debts so that you can pay the combined debts under same interest for a given period of time depending on the terms of service of the company.