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Do Low Interest Debt Consolidation Loans Exist?

Dan Steadman

Financial Advisor, MoneyBeagle

Do Low Interest Debt Consolidation Loans Exist?An Introduction to Debt Consolidation Loans

Debt consolidation is a strategy for repairing your credit rating and getting your financial house in order. It is a way for people with multiple debts owed to different creditors to get themselves on a workable payment schedule. The basic concept is that all of the existing debts are paid off with a single personal loan. The borrower then makes monthly payments on the personal loan and only has to be concerned with one interest rate for that loan.

The most important thing to work out when you are considering a debt consolidation loan is balancing the interest rates for the individual loans against the interest rate you are offered for the consolidation loan. For instance, it is likely that you have different interest rates for your car loan, mortgage, credit card balance and student loans. You may actually have to take on a higher interest rate for a debt consolidation loan than your current interest rate for your mortgage or car loan. However, the increased interest rate may still be beneficial to you if it is lower than your current interest rates for some of your larger and more pressing debts.

What Determines the Interest Rate of Your Debt Consolidation Loan

If you are considering debt consolidation as an option, you should find out what your credit score is as soon as possible. This is vital information because the financial institution that offers you a debt consolidation loan will consider your credit score in determining the interest rate that you will pay. The other thing that will help to determine the interest rate you will be offered is the total amount of your debt that you need to consolidate.

In general, if you are going to apply for a debt consolidation loan with a higher balance, you will be offered a higher interest rate. If you have a poor credit rating, then you could even end up paying more in interest for a debt consolidation loan. For anyone who has a good credit rating, this is good news because it means there is a possibility you could get a loan with a reasonable interest rate.

The key to getting the most affordable interest rate for your debt consolidation loan is to check with more than one lender for interest rates. You are able to shop around online for different rates by offering the total amount of debt that you need to finance as well as your personal information for a soft credit check. You should not fret about your credit score being affected by soft inquiries from lenders if you apply for a loan estimate online. The only time that your credit score would actually be affected by a loan application is if you go through the process of officially filling out an application.

Types of Debt Consolidation Loans

Basically, the idea of a debt consolidation means that a new loan is opened and used to pay off other debts. It is ideal to have a lower interest rate compared to the earlier loans. To that end, there are several types of loans and loan facilities for consolidation. There is the personal loan, the mortgage consolidation, and the credit card balance transfer.

The hardest consolidation loan option to obtain is the personal loan. This requires that a bank or financial institution would provide a personal loan. These loans entail providing collateral for the loan. As far as the bank is concerned, it is no different from other types of personal loans. As a personal loan, it is applied first with the express purpose of paying off other loans. The collateral for the other loans are not included in the application for the loan.

There are banks and other financial institutions which provide personal loans expressly for debt consolidation. In this case, the loan provider takes over the papers from the original loans, including any mortgage or collateral.

This is precisely what debt consolidation for home mortgages aims to do. In the case of mortgage consolidation, the primary and the second mortgage are consolidated into a single loan. This is not usually utilized of unless interest rates drop to a level which can make it more affordable for the homeowner. Mortgage interest rates are volatile, and can increase or decrease based prevailing rates.

Banks usually offer better rates for mortgages when the interest rates decrease. This is also the time when banks start calling homeowners with mortgages in other banks. They offer better interest rates if the borrower will transfer their outstanding loans.

Of course, there are other costs involved during the transfer of mortgages between banks and other lenders. Homeowners should calculate the cost of the loan, including other costs, as well as the monthly mortgage payments. Use a consolidation loan calculator to help with this decision. For some, the total cost of the new consolidated loan might be more than the older two mortgages. In which case, it might not be worth it to consolidate the mortgages. However, if the consolidation loan payment is lighter monthly payments, even if the total cost were more expensive, then the homeowner can still decide to consolidate the mortgages.

Another thing to consider about a second mortgage is that it is usually a smaller loan than the primary mortgage, but with a higher interest, and shorter repayment period. If the consolidated loan had a smaller interest rate than the second mortgage, and spread the second mortgage over a single term, then it would be a better offer than the existing double mortgage.

For those who have credit card debts, credit card companies usually have campaigns for loan consolidation. This is particularly useful for those with multiple credit cards with outstanding balances. There are several considerations when a credit card company offers a debt consolidation. You’ll want to consider if the balance transfer offer leaves you in a better financial situation, and if the balance transfer offer has a high enough limit to take on all of your current outstanding credit card debt.

In some instances, the consolidation is for only one credit card provider. In others, the consolidation might include multiple credit cards. What is important is that the creditor acknowledges the debt and is willing to consolidate the loans to pay it off eventually.

With credit cards, the debt itself is paid via interbank transactions. The debt is transferred to a single bank or credit provider, with the outstanding debts paid off, and you now consolidate debt on only one credit card.

There are some credit card companies which put a limit on how much debt can be consolidated. For all intents and purposes, the total credit owed is practically the new credit limit on the card, assuming that the monthly repayment schedule is adhered to.

The monthly repayment scheme is part of the agreement. This states that the credit card holder will repay the total balance over a given period, and will pay a certain minimum amount every month. If the credit card holder is not able to pay the monthly charges, the credit card company may add penalties according to the terms of the agreement.

Debt consolidation for credit cards is not just placing the various debts in one basket. It also puts into place a plan where the credit card holder will be able to repay the outstanding debts. For a credit card company, there are several goals for debt consolidation, The credit card holder is given a better chance to pay his debts. Another advantage of this approach is that after the debts have been repaid, the credit card holders are now in a position to use their buying power backed by the credit card company. The credit card companies and their banks are not only buying debts but also recruiting credit card holders.

What if You Cannot Get a Low Interest Rate for a Debt Consolidation Loan

There are ways to improve your credit score in order to qualify for a lower interest rate loan. You can start by paying off any accounts that have been sent to a collections agency. It will take at least 30 days for your credit report to show any updates that an overdue account has been paid. You should check your credit score after you have taken steps to pay off your debt to make sure that the changes have been reflected in your file. When your score has improved, you can try again to apply for a debt consolidation loan.

One strategy which is effective but is not very often availed of is to negotiate for  loan restructuring. The goal of restructuring your loan is to assure the bank that the loan is going to be repaid. Another benefit of loan restructuring is that the debtor can negotiate for better loan repayment terms. This may include lower interest rates during the duration of the loan, as long as regular monthly payments are maintained. In some instances, some amnesty for the accrued interest is also included in the negotiated repayment scheme.

In some instances, the only thing required to meet the debt consolidation is to have fewer loans for repayment. In this case, it is up to the borrower to meet the requirements of the bank. That being the case, the borrower should try to pay off a loan or two, and lower the total amount of the loans.

Another way for a loan to get a low interest rate for a debt consolidation is if the total amount is within the means of the debtor. The bank aims to collect on the loan. It does not want to hold the collateral. In some cases, a necessary debt restructuring and an amnesty is required first, before the lender will consider debt consolidation.

Debt Management and Debt Settlement

The aim of debt consolidation is to finally repay the loan. To do this, the loans are transferred from several lenders to only one. Along with the consolidated debt, the debtor has to agree to a repayment scheme which would make sure that the loans are all paid within a specified amount of time.

One way for debts to be repaid is for debt settlement. In this method, a lump sum settlement is paid to the creditor. This is usually less than the outstanding balance payable. This option is only available if you are continuously late on your payments, as a lender is not going to just accept a lower payment for no reason at all. Debt settlement is thus a last resort option, so be wary of organizations that run ads claiming that you can settle your debt for pennies on the dollar. Debt settlement also only works if you have the large lump-sum payment on hand, and if it is only available in the instance of debt settlement. You can’t use a windfall like an inheritance for debt settlement, because the lender would rather you just pay the full amount that you owe.

Debt management is another method of loan repayment. This method uses a non-profit counselling organization as an intermediary between the lenders and the debtor. The counselling organization is responsible for negotiating with the lending bank. The loans or debt is consolidated into a single loan, and is payable with a restructured loan payment. There is a choice between having a lower interest rate or a shorter payment period, typically of 3 to 5 years. You might find better rates with veteran debt consolidation if you're current or former military.

Due Diligence

The above are just some options to have a low interest for debt consolidation. The whole matter is about working with the lender institutions, in order to repay the outstanding loans. The agreements between the debtor and the lending facility help ensure that the consolidated loan will be repaid.

For the debtor, it is a chance to repay the loan, and to improve the credit scores. This can later be used in acquiring loans for business or for home improvement. A solid credit score is also important if you need to take out an emergency loan, which can happen from time to time.

Dan Steadman

Dan Steadman

Financial Advisor, MoneyBeagle

Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems. 

Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.

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