What Is A Bank Debt Consolidation Loan?
As the name suggests, bank debt consolidation loans provide a vehicle for combining a large number of separate debts under a single loan with a single monthly payment. As is the case with all bank loans, the less you need the loan, the lower your interest rate will probably be. For individuals with excellent credit scores, bank debt consolidation loans are often available with rates below 7%.
For students and other individuals with credit scores in the good to fair range, interest rates may reach into the low teens, and banks will require substantial collateral. Typical examples of collateral required for bank debt consolidation loans include:
- A home or other real estate
- An insurance policy
- A savings account
- Investment and retirement securities
Banks will usually require that savings accounts and securities such as stocks or bonds used as collateral be placed in escrow until the debt consolidation loan is repaid. In the case of smaller size bank debt consolidation loans, banks may accept the title to an automobile, as long as there are no other liens on the title. Banks always welcome a cosigner with a very strong credit rating, and often make available better loan terms for cosigned loans.
How Are Bank Debt Consolidation Loans Helpful?
In today’s economy it is easy for individuals or families to find that they are making separate payments on three or more unsecured debts, each with different due dates and interest rates. Some examples include:
- General-purpose credit cards
- Credit cards issued by department stores
- Automobile loans
- Medical bills not covered by insurance
- Outstanding student loans
- Installment loans related to the purchase of major household or recreation related items
- Even prior debt consolidation loans
Bank debt consolidation loans provide the buyer with a single monthly payment, and often a lower interest rate than the average of the consolidated debts. Depending on the term of the loan, the monthly payment amount may be considerably lower than the sum of the pre-consolidation payments. Other benefits of bank debt consolidation loans may include:
- Eliminating high interest credit card debts with balances that grow every month despite making required minimum payments.
- Lowering the percentage of monthly gross income consumed by debt payments, reducing stress, and improving the quality of life.
- Providing disciplined borrowers a clear pathway to becoming debt free.
- Significantly improving credit scores by eliminating maxed out credit cards, reducing the occurrence of late payments, lowering the borrower’s monthly debt to income ratio, and allowing the borrower to establish an uninterrupted history of on time payments.
Debt Consolidation Considerations for Student Loans
Recent steep increases in the cost of higher education have made student loans more important than ever. Students often graduate with a number of different student loan programs to pay off, and jobs with starting incomes well below the level required to service the combined payments. Bank debt consolidation loans are available to provide the convenience of a single more manageable monthly payment, but even with a cosigner and reasonable collateral, banks often see student debt consolidation loans as having a higher default risk and higher servicing cost than other loans. The interest rates on bank debt consolidation loans for student loan debt reflect these concerns. Students and their parents may be well advised to explore available federal student loan and loan guarantee programs. Interest rates on these programs are not sensitive to the borrower’s credit score or current employment status.
Tips on Getting the Best Bank Debt Consolidation Loan for You
Banks are not charity organizations, and loan officers have an understandable aversion to having their names associated with “nonperforming loans”. People are often driven to seek a bank debt consolidation loan by a panicky feeling that they have lost control of their personal finances, and are hopelessly trapped. If that describes your personal situation, an excellent first step is to take advantage of free credit counseling services provided by a reputable local nonprofit organization. A qualified debt counselor will consider both available income and total debt, and help develop a monthly budget which includes an affordable allocation for debt payment. The debt counselor will then suggest a target combination of interest rate and loan duration that should be available at area banks, enabling you to approach bank loan officers with a calm demeanor and a clear picture of the bank debt consolidation loan you are seeking.
Approaching a number of banks before signing a debt consolidation loan application has several advantages. Remember that from the perspective of a loan officer, each applicant represent a potential investment. Presenting yourself to a number of loan officers gives you the chance to polish your “pitch”, and also helps you develop a sense of which banks are likely to give you the best terms if and when you apply. Complete at least two bank debt consolidation loan applications, and select the best resulting loan offer.