What is debt consolidation?

In businesses, there are profits as well as losses, and when there are losses businesses have to take loans. Debt consolidation is basically a term related to loans and liabilities. It is the act of taking out loans for paying the debt and other liabilities.  You can take multiple loans that are combined into a single, larger debt, probably with more favorable payoff conditions.  Favorable payoff conditions can be low-interest rate or lower monthly income or both.

Why do we need to think about debt consolidation for business loans?

1. It simplifies your payment process: Maintaining and managing different debts and payment dates is a tedious task and you might miss making a payment when having so many accounts. Consolidation loans combine all of the debts and arrange them into a single monthly payment with a simple interest rate. During crisis times, when you need to adjust and maintain expenses, a consolidation loan can be key to reducing expenses and freeing up cash.
2. These loans are supportive during Emergency Situations: There are many situations other than COVID where finances can get tight such as loss of employment, divorce, medical issues, or loss of a significant other. These situations can happen unexpectedly making it crucial to lowering expenses to maintain mortgage and auto payments.
3. Better Interest Rates: Unlike credit cards, consolidation loans have a simple interest rate, unlike credit cards that compound daily. Simple interest rates are charged on the principal balance annually whereas credit cards charge on the balance daily. It’s important to find a rate and term that makes sense for your specific needs. The longer the term, the higher the rate. If you need a lower monthly payment, a longer-term may be more suitable but it can result in paying more interest. If you can afford the higher payment, then a shorter team will save you the most money. Everyone’s situation is different so find an option that’s best for you.
4. It helps improve your credit score: Once the loan has been funded, it will show up on your credit report within a month or so. The lender will then report all payment activity to the credit bureaus. As long as your making payments on time, this will reflect positively for your FICO score. If you have credit cards with utilization over 30%, the creditors will report this as a negative to the credit bureaus. By consolidating them with a loan, the utilization goes down to 0% which then has a positive impact on your credit score since they no longer report the above 30%.
5. The application process is hassle-free: The application process to apply for a loan is quick and simple. Every lender has different underwriting guidelines but most lenders have some basic questions regarding income and credit score. Some lenders require a hard check on your credit which will show on your credit report as a hard inquiry. Too many hard inquiries can have a negative impact on your FICO. Most lenders now days do a soft check which will not show on your credit report at all. You can do as many soft checks as you like without ever impacting your score. If the lenders deem you to be lendable, then a hard check will be required to finalize an offer. Once you receive an offer, within a few days the funds are sent to your creditors and you’ll begin to have a new single monthly payment with only them.