Debt consolidation loan helps the borrower change the terms of the agreement and ease the debt burden. This service can be used if there are unplanned expenses. It is quite popular in Western countries.
Advantages of debt consolidation loan
Consolidation is a refinancing of several credit accounts into one to pay off debt. As a rule, a reduced rate is applied to such debts, so the debt pressure on the borrower is reduced. A single account is also convenient for other reasons:
- it is easier to manage debt;
- a debt repayment scheme is developed for a specific client, depending on his financial situation;
- you can attract co-borrowers, security and guarantors of the transaction;
- the credit rating rises as the number of regular payments decreases;
- the total amount of monthly payments decreases;
- less money is spent on commissions for servicing several bank accounts, transactions;
- service in one financial institution;
- successful completion of the program, the credit history improves.
Financial managers are usually involved in drafting a debt consolidation program. They meet with the client, find out the reason for the non-fulfillment of the loan agreement, and then determine on what terms their client can repay the loan.
Disadvantages
You can use such a program only for viable reasons – for example, due to illness or dismissal due to staff reductions. This is especially true for secured loans. After all, banks are more willing to go to the procedure of compulsory debt collection.
- banks are more likely to offer the program to limited number of customers;
- the borrower must be solvent;
- the consolidation service is paid;
- the lender requires a pledge or surety;
- with poor payment discipline, more stringent terms are charged;
- not all banks offer this option.
The objective of debt consolidation loan
Experts recommend not applying immediately. It’s best to evaluate all your loans first and pay off the smallest ones. This will not only reduce the load, but also improve the reputation, increase the chances of a positive response from the bank.
It is not advisable to settle for a secured loan when it comes to unsecured loans. If the client does not comply with the terms of the agreement or the payment schedule, he may lose valuable property. The term of the aagreement is important: the longer it is, the greater the overpayment will be. You will also have to repay the card loan, even if the grace period has not expired.