Online lending has opened the door for many finance companies to sell debt consolidation loans to borrowers who are struggling in debt. But, is a consideration loan right for you?

Here are things to keep in mind when planning to consolidate your loans.

First, there are many consolidation lenders out there. Unfortunately, some people get deeper into debt right after using this financing option, simply because they have chosen to borrow from the wrong consolidation loan company. So, what differentiates a good debt consolidation company from a bad one?

  1. A reputable consolidation company is transparent. These finance companies will not hide anything from you. They will explain which circumstances would lead to an increase in interest rates and fees, and extension of the loan term. For example, there are lenders that would increase your payment and extend the loan period when your weekly or monthly payments are less than the required repayment.
  2. It has knowledgeable and skilled loan experts. A reputable lending company has its own in-house loan officers that would discuss the term of the loan with you and walk you through the application process. You don’t have to feel weighed down as long as the loan officers understand that you are struggling to meet all of your loan payments and offer you the most suitable loan product that could cover the payments. For example, if you have multiple credit card debts and you have problems in repaying them on time, not because you are really struggling financially, but because you have not organized a payment scheme, your loan officer may just offer you a short term loan. It can help you roll down your entire debts into one simple loan that you can repay on a short period. But, if you have defaulted on your mortgage, car financing, student debts and many other huge loans, the loan specialist may recommend a larger amount of debt consolidation loan that could cover all the debts and give you some free amount of money to use for personal or business purposes.
  3. It understands your overall debt restructure. The first thing that a loan officer does is to assess your current debt situation to establish the type of debts you owe, the exact amount you need to cover and the mode of payment that will be suitable for your situation. They will assess which debts need to be consolidated and those that need to be repaid individually. When you consolidate a debt, you are in fact, consolidating it along with other debts. The amount of the consolidation loan is based on the amount of loan, the term remaining and the interest cost of repaying each debt; as well as other fees, such as pre-payment penalties, late charges and additional interests because of default.
  4. It offers a consolidation program for people with bad credit. There are many borrowers with too much debt. They want to obtain a debt consolidation loan, but the tight banking regulations make it impossible for them to apply for one.

While banks may approve loan application from borrowers with a few small defaults on their credit report, those with larger defaults and judgment may not qualify for the loan. There are also borrowers with mortgage arrears who may not be eligible for consolidation loan from banks.

On the other hand, specialized lenders approve loans of borrowers with poor credit score because they are using different lending criteria to determine their capacity to repay. For example, if you have a few defaults on your loans, the lender may take a look at what these are, ask you as to why these things happened and accept your reasons. If you have loans and mortgage in arrears, it is advisable to explain the reasons to your lender. They may arrange a debt consolidation loan in your favor based on your explanation.

Second, debt consolidation is one of the best ways to tidy up your credit. If the lender offers a practical repayment strategy and you follow it, you might be able to manage your way back to good credit, sooner than you could imagine.

Debt consolidation simplifies your loan repayment. Instead of paying several credit cards, loans and a mortgage or other outstanding utility bills one by one, you can get a new loan to pay them all off. You will be left with only one loan, one due date to think of and one interest rate to worry about. By rolling multiple debts into a new one, you can enjoy lower interest rates, shorter or longer loan duration, and save more money on your loans. Your credit score will also improve because your outstanding loans which are included in the consolidation loans will be considered paid in full. You may also enjoy spare cash to pay for your other personal or business needs.