One of the most important hurdles businesses face is that of raising finance. This is especially true for small businesses, as options can be few and exhausted quickly. Taking on too many loans can get expensive, and pose the additional administrative challenge of keeping track of them.
Thankfully, there is a way to make dealing with this problem much easier – debt consolidation loans. In this article, we will be discussing this method of raising finance, the benefits of doing so, and how you might obtain such a loan. Let’s get started.
What are debt consolidation loans?
In short, debt consolidation loans are a tool used to, as the name suggests, roll all your debts into one. This means that you will be paying only a single amount each month, helping you keep track of your loans and reducing the total amount of interest you must pay. This can help make your loan repayments much more straightforward and, more importantly, cheaper.
Naturally, the amount of debt consolidation loans available to you and the agreements’ terms primarily depend on your credit history. With a good credit history, you can expect to be eligible for a large number of debt consolidation loans, many with favourable terms. With a particularly good credit history, you can also expect to pay low interest rates, reducing your overall loan repayments considerably.
Do debt consolidation loans impact your credit history?
As you might expect, debt consolidation loans do have an impact on your credit history. This comes into effect once you apply for one, and has a positive effect once you pay it off.
During your application for a debt consolidation loan, you will have to supply a report of your credit history, amongst other important documents. This request for your credit history will likely come in the form of a hard inquiry. A hard inquiry is essentially a request made by a lender to see your credit report. This report will give them insight into how trustworthy a borrower you might be, and whether you can be expected to repay the debt. While not necessarily a bad thing overall, a hard inquiry, or hard pull, will negatively affect your credit score once it is requested. Broadly speaking, it will not affect it by any more than 5 points, though there are edge cases that see a larger impact.
A hard inquiry isn’t necessarily a deal breaker despite the initial negative impact. In the case of debt consolidation loans, they can make your loan repayments cheaper and easier to pay back. This utility alone can offset the negative impact on your credit score, but if the debt consolidation loan helps you repay your debt, your credit score can benefit. This benefit will make up for the impact caused by the hard inquiry, and possibly leave you better off than before, depending on your loans and whether you have made late repayments.
How you can obtain a debt consolidation loan
Obtaining debt consolidation loans is a fairly simple task. First, you will need to make a list of all your loans you want to consolidate, plus their monthly repayments. Then, it’s as simple as looking for a debt consolidation loan that exceeds the total amount of debt you currently have. You should also look for a debt consolidation loan that has a lower interest rate than what you are currently paying. This will mean your monthly payments decrease, lessening the financial pressure faced by your business. That said, take care to avoid debt consolidation loans that don’t blow your budget out of the water. Doing so will make it more difficult to make repayments, defeating the purpose of debt consolidation loans. You should take care to shop around, increasing your chances of finding a suitable debt consolidation loan for your situation.
Should I take out a debt consolidation loan?
As we’ve mentioned throughout this article, debt consolidation loans excel at organising your debt, making it easier to keep up with your repayments. For companies struggling with a multitude of loans at high interest rates, debt consolidation loans can be invaluable. Once employed, it can mark the start of a company regaining control over its finances.
Naturally, debt consolidation loans are an excellent idea, if you can get one at a relatively low interest rate. Doing so will result in paying less interest and a cheaper debt repayment plan overall.
While debt consolidation loans are undeniably useful, are they better than alternatives? For one of the most commonly used alternatives, credit cards, the answer is yes. Credit cards can be useful on an individual basis, allowing private individuals to make necessary one-off purchases, but they aren’t very suitable for businesses. They are not flexible, often requiring several credit cards or other loans to raise the necessary capital for a company. Moreover, these credit cards almost always come with a high interest rate and other fees. Other alternatives, such as personal loans, suffer from the same downsides. They also have high interest rates, in addition to being unlikely to raise enough capital for business use.
However, debt consolidation loans do not suffer from the same problems. They can be used to raise higher amounts of capital, enough to match the outstanding amounts of other loans. They also have lower interest rates than the previous two alternatives, with repayments made in regular installments. This means they fit the category of installment loans, ensuring you know exactly what your monthly payments are and the overall term of the loan. Assuming you stick to the repayment plan, uphold your end of the deal, and keep up with your monthly repayments, you know exactly where you stand. You won’t have any additional costs, cutting out the uncertainty inherent in many of the other alternatives.
Conclusion
Debt consolidation loans can be an excellent way for companies to regain control over their finances. They are simple and straightforward to obtain, following largely the same process as any other loan application. Moreover, they are more flexible, providing companies with larger amounts of capital than other alternatives, while also charging lower interest rates. This allows companies to roll their debt into a single loan at a cheaper rate. Stopping their debt from spiralling out of control. As such, debt consolidation loans are an excellent option for any company struggling with debt.