$20,000 Debt Consolidation Loans

While debt consolidation is not a complicated process it can be confusing to some people. Let’s begin by answering a few basic questions. We will use the scenario of a borrower who wants to take out a Debt Consolidation Loan for their debt of $20,000.

What Is A Debt Consolidation Loan

Debt consolidation is a process undertaken by an individual who has several unsecured debts in an effort to make payment easier and reduce the interest paid on all debts. This is done by securing a loan from a bank or lending institution which is used to pay off the outstanding balance on all debts. The borrower then only has one loan to pay off monthly instead of four or more debts from different lenders. In many cases, the interest rate on the consolidation loan is slightly lower than the rate on the current debts.

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Who Can Use A Consolidation Loan

As stated above, a consolidation loan can be used by anyone who wants to pay a single monthly payment to one lender instead of numerous payments to different lenders.

In some cases, a consolidation loan can be used to pay lower interest rates than current debts carry. This is especially true for credit card debt, which usually carries around 19% interest.

If the borrower has a poor credit score and history the consolidation loan may result in a higher interest rate than outstanding debts.

What To Consider When Taking Out A Consolidation Loan With Bad Credit

A poor credit score can make receiving a consolidation loan difficult. A score of 580 is likely to be the lowest score that will allow a borrower to receive a Debt Consolidation Loan, although many lenders prefer a score of at least 620.

A borrower who holds $20,000 of debt may find it difficult to secure a loan for the entire amount with a bad credit score. In this case, they may consider splitting the sum into two and seeking two consolidation loans at $10,000. Lenders will be more willing to lend a smaller sum to someone with bad credit.

If the borrower can only secure a Consolidation Loan for a portion of the sum it can still be worth it if the loan is used to pay off the highest interest loans, combining them into a single monthly payment.

Term is also important. Everything has a price and the price of money is interest. When your loan has a longer payback period, the interest is higher and thus the borrower will pay more their loan over time. If the term is too short, the payments may become burdensome and the difficulty making the monthly payments may arise. One does not want to spread their finances so thin that a small emergency can leave them without the ability to meet their monthly payments.

The Pros And Cons Of A Consolidation Loan

As with anything in life, a Consolidation Loan has pros and cons. The greatest pro of Debt Consolidation is the ease. All debts are consolidated into one monthly payment to one lender. People often have trouble tracking exactly how much they are paying monthly across all their outstanding debts. Having one monthly payment allows for better budgeting and planning.

The greatest con of Consolidation Loans, especially for those individuals with poor credit history, is that the interest rate can often be higher than the rates their outstanding debts carry. Another major con is that it requires the borrower to exercise a level of economic discipline that they may not be able to. Many may be tempted to use their newly paid off credit cards, racking up debt once again while still having to pay the Consolidation Loan.

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