$10,000 Debt Consolidation Loan

Debt levels in the US are at an all-time high level today, with most individuals having multiple debts to pay off. The best solution if you ever find yourself in this predicament is to get a debt consolidation loan. Such a loan often provides you with better repayment terms and makes the process easier as you only deal with one debt provider. But before you apply for a debt consolidation loan, it’s important to first know what you’re getting yourself into.

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How it works

To understand this concept, it’s best to use an example. Imagine you have three credit cards with a total debt of $10,000, all from different banks. Every month, you have to pay a total of $1,500 to the three banks at different interest rates just to cover the interest. Instead, a debt consolidation loan of $10,000 can help you pay off the total debt at once and be left paying back that single loan, hopefully with a lower interest rate.

What are the benefits of debt consolidation loans?

The main advantage of such a loan is the favorable repayment terms you can get compared to what you were paying previously. In our example above, you may be paying back your credit card debt at a high interest rate perhaps because of your credit score or simply the bank’s unfavorable terms. Instead, you can offset any additional payments in interest by paying off the debt instantly. Furthermore, you might get some very good terms on your debt consolidation loan. The average interest rate on such loans is about 10.6% compared over 24 months to the average interest on a credit card of over 15%.

Apart from the interest rate, you also get peace of mind since you determine what repayment period works best for you. Maybe the $1,000 monthly payments aren’t workable under your budget, but a debt consolidation loan of $10,000 could be taken for a longer period with less monthly payments. By the end of this repayment period, you will have greatly improved your credit score as a bonus.

Are there any downsides?

There really aren’t any direct downsides beyond circumstantial ones. For instance, interest rates may still be high depending on your credit score. Any previous defaults in payment of, say, credit card debt, can raise your interest rate beyond the average of 10.6%. Add to that, it’s still a debt and one that will have to be repaid for a long period of up to 5 years, which can seem like an eternity.

How do you qualify for a debt consolidation loan?

In general, one can qualify for up to 200% of your annual income before tax. Therefore, for a $10,000 debt consolidation loan, you need to make at least $5,000 a year, but there are still other considerations to be made. Nevertheless, this is a good place to start, before you can find out how much you will have to pay in interest. This will be determined by the lender, and there is no fixed number.

Here you simply have to apply from multiple lenders and find out their specific interest rates. This process should not hurt your credit score because the lenders will only perform a soft credit check. It is only after accepting an offer that the lender will do a hard credit check. In case you have bad credit, you can still get a debt consolidation loan, but it would be easier to split the loan across lenders.

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