A bill consolidation loan as the name would suggest is the process of consolidating all your debts, and taking a loan to pay them off at once. Taking these loans has become a popular option for most people because you can pay off high-interest debt thereby saving you money in the long run.
By helping you pay off your debts sooner, you avoid being in debt for an extended period, as most loans will tie you for several months or years before you complete the payment.
However, as popular as they have become, one should be aware that there are advantages and disadvantages to debt consolidation. If you take a loan to pay off the consolidated bills without paying due to attention to the terms and conditions, you could end up paying higher interest rates thus immersing you more into debt.
Advantages and Disadvantages of a Bill Consolidation Loan
Advantages of Bill Consolidation
The main advantages of consolidating your debts are that you can now make one monthly payment, which will make it convenient for you. Debt consolidation may result in you making less monthly payments although this may not always be the case; we will explore why below.
Disadvantages of Bill Consolidation
The disadvantage of a bill consolidation loan is that depending on how your credit score is, you could end up paying high-interest rates. The interest rates may vary depending on the loan type and market conditions; you can never predict when they may rise.
Even by consolidating your bills, the repayment period can still be long, and you, therefore, end up paying more in interest. You should also note that while psychologically you may feel that you have less of a debt burden, the reality is that you still owe quite a bit in debt, and should, therefore; avoid using your credit cards carelessly. Because you are making only one monthly payment, you may be tempted to take on small loans thinking you can pay them off quickly.
Before agreeing to apply for a bill consolidation loans, it would be advisable to speak to a financial advisor who will walk you through everything you need to know. You have several options of where to apply for the loans including a getting a debt consolidation loan online.
Those with poor credit scores can still benefit from the bill consolidation loan. Before applying for the financing, check your credit scores to confirm whether or not the lenders will be willing to give you a loan. Take heart though, even with a poor credit score, you can still qualify for bad credit loans. But taking a bad credit loan may not make sense for you because of the high-interest rates; the idea of Bill consolidation is to get out of debt as quickly as possible while paying the lowest interest rates.
Ways to Consolidate Debt
Credit cards balance transfer
Depending on the type of balance transfer you have on your credit card, you can have the option of 0% interest rate for some of the billing Cycles. Some credit card providers will require that you pay a small fee before you can do a balance transfer. If you have a good credit line and the creditors policies favor you, you can have quite a bit of leeway in how much you can transfer. Be careful about the interest rate though; it may be high.
Home equity loans
Home equity loans are a type of secured loan which applies to homeowners. You can use your home as collateral to get a home equity loan. The main advantage is that the interest rates are not very high if you compare it to a personal loan. Secured loans such as these are also easier to get because the lender has some form of insurance against your inability to pay. In some States, any interest paid on the loans will make you eligible for a tax deduction.
However, if you are unable to pay back the loan, you will lose your home.
You can get personal loans from credit unions, online or even from banks. The lender will look at your credit history, income, among other financial aspects as this will determine whether or not you’re eligible for a loan. The lender will tell you the timeline within which you will require to pay off the debt. Some lenders may require that you have some good security or collateral before they can extend you a loan.
Before you apply for a personal loan though, make sure you have a plan on how you will pay off the debt. Personal loans are also suitable for moderate debts; taking one loan for a small debt that you could pay off in a short time will not make sense. It would also be good for you if your credit score is high so that you benefit from the low interest that the lenders would offer you. Note that those with low credit scores may not qualify for these loans or will get loans at a higher interest rate.
Bill Consolidation Loan Using an Unsecured Loan
To qualify for an unsecured loan, you will need to have a good credit history as this will impact on your credit scores. But, you will pay more interest when you compare it to a secured loan. You may, however, find that if you compare what you are paying on your credit card balances, the unsecured loan interest is better.
The downside to unsecured loans for a bill consolidation loan is that if you do not have a good credit history, you are unlikely to get one. Also watch out for additional charges, because they will eventually impact on what you think you are saving by consolidating your debts.
A Word of Caution before Taking a Bill Consolidation Loan
Before consolidating your debts and taking a loan to clear them, always have it at the back of your mind that you will still have to pay back the debt. Consolidating your bills will allow you to focus on one loan and give you the flexibility of 1 monthly payment. If you get one with low-interest rates, it will significantly help with your financial situation. However, you will still have to pay off the debt, and you need to practice fiscal discipline so that you do not get into more debt.
It is crucial that you change your mindset about how you spend your money so that you avoid getting deeper into debt. Do not give yourself any opportunity to borrow more money, and if it means that you cut up your credit cards, please do so. Have an emergency fund so that you have a source of money that you can draw from without having to borrow from any financial institution.
A bill consolidation loan is a great way of getting your finances back in track. However, do not for one minute convince yourself that you are no longer in debt because you are making one monthly payment. Talk to a financial advisor who will walk you through the process of taking a loan; whether secured or unsecured, so that you can start the process of getting your credit score back on top by having to worry less about missing out on some of the monthly loan payments.