How Do Debt Consolidation Companies Work?
When used responsibly, debt can be a useful tool. It allows people to gain access to a home, vehicle, education, and even medical treatment when they otherwise wouldn’t be able to afford it.
Unfortunately, debt isn’t always used wisely and can leave individuals in a difficult financial situation. Anyone who finds themselves struggling with medical bills, loan payments, and credit card debts may decide to contact a consolidation company for help.
These institutions can help by granting a lending product that allows the borrower to pay off all of their outstanding balances, leaving them with a single monthly payment.
A consolidation loan typically has an interest rate similar to that of a personal loan or unsecured line of credit. Thus, this process can be particularly useful for individuals who carry several high-interest arrears, such as credit cards and payday loans.
For example, take a borrower who holds $10,000 in credit card debt, $3,500 in payday loans, and $5,000 in high-interest medical bills. A consolidation lender would be able to grant them a loan for $18,500, which the debtor would then use to pay off their outstanding dues, leaving them with a single arrear of $18,500.
Some may be wondering, “what does the lender get out of this?”. Just like any other lending institution, a consolidation company makes money by charging interest on the financing products it gives out. This typically results in a mutually beneficial situation for both parties. The borrower receives financing with a lower interest rate than their current debt load, and the lender makes money off the monthly interest payments.
It’s important to note that these lending products are relatively standard and don’t have the negative stigma attached to them that other debt vehicles, such as payday and hard money loans, do.
How Do We Review Debt Consolidation Loans?
Not all lending products and lenders are equal, and while some are undeniably superior to others, most factors depend on the individual borrower’s situation. For instance, while some financing providers offer better rates, not all are willing to approve applicants with a low credit score.
Because of this, you should consider several different components when reviewing debt consolidation companies, the most important of which are listed below.
- Interest rates: It should come as no surprise that interest rates are one of the first factors considered when reviewing a lender. Even just a few points of difference can mean hundreds or thousands of dollars in extra interest charges over the loan’s life. Applicants with a high credit score will look to take advantage of the best rates possible, whereas those with a less than desirable rating may have to settle for slightly higher rates
- Term: Although a shorter tenure can result in a less costly loan, many borrowers will require an increased term length to make the monthly payments smaller and more manageable. Not all lenders offer the same term lengths; some may offer terms as long as ten years, while others as short as five years
- Eligibility requirements: As mentioned above, not all lenders cater to the same type of borrower. While some prefer to work exclusively with individuals who possess a high credit score, others cater to borrowers with a poor credit history
- Approval process: Some financing providers require more information than others, and, as a result, the approval process may take longer. This may be an essential factor for borrowers who can’t wait five to eight business days for approval. Thus, they may decide to work with a lender whose approval process can be completed in as little as two business days
- Special features/customer service: Lenders are in competition with one another, and as a result, some companies offer unique features and better customer service than others. For example, several lending institutions will offer a payment deferral period to borrowers who unexpectedly lose their jobs. In contrast, others may offer financial tools to help track spending and save money
- Pros and cons: Once all the above considerations are taken into account, each company can be rated by outlining a basic set of pros and cons. This allows users to quickly determine which financing option best fits their specific needs and requirements. It also allows users to quickly and efficiently compare and contrast the best online lenders, allowing them to make a quality and informed decision
Which Debt Consolidation Loan Is The Best For Me?
When borrowers compare different lenders and loan products, they should begin by asking themselves a few basic questions.
- What monthly payment can I afford? A consolidation loan is a smart choice only if you’re confident that you can afford the monthly payments. If you're looking for a low monthly payment amount, then it’s best to go with a lender that offers longer than average tenures - the longer the term, the lower the monthly payment
- What is my credit score? Credit score and history is the first thing a lender will look at. It’s also the most critical factor they’ll use when deciding whether to approve or deny a loan application. If your rating is on the low side, then it’s best to apply for a lending product with companies, such as bad credit direct lenders, that have more flexible eligibility criteria
- Is my employment situation stable? A few online lenders will offer a grace period to those who have unexpectedly found themselves unemployed. If you're concerned about job security, it may be worth applying for a consolidation loan with a company that’s willing to offer a deferment period to those who unexpectedly lose their job, even if the interest rate is slightly higher
- How fast do I need the loan? Debt consolidation is often undergone by people who can no longer handle their monthly debt/bill obligations and need help getting them under control. Unfortunately, some people leave it until the last minute. Therefore, they’re at risk of missing payments or going into default if their loans don’t come through quickly enough
If you need a lending product for overdue bill consolidation fast, then choosing an institution that can complete the approval and deposit process in just a few business days is likely the preferable option
Debt Consolidation Solutions For Bad Credit
Banks and traditional lenders have stricter lending criteria than most online loan companies. Because of this, individuals with poor credit may have been denied consolidation financing in the past.
Luckily, several institutions focus on approving debt consolidation loans for bad credit borrowers.
It’s crucial to keep in mind that the lower the applicant’s score, the higher the interest rate they’ll receive. In the majority of cases, this rate will still be lower than most high-interest, unsecured debt.
The Bottom Line
When used responsibly, a consolidation loan can turn a bad debt situation into a manageable one. It can provide a lower interest rate, give a finite payoff date, and lower your arrear’s overall cost.
However, part of being responsible is picking the lending product that works best for your financial situation.
While reviewing the top lenders listed here, it’s vital to consider the pros and cons as they relate to your specific needs and situation.