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Debt Consolidation loans are loans that are taken out in order to pay off other debts. They usually have a lower rate of interest than the average credit card interest rate, and can make it easier for the debtor to pay their bills each month since a consolidation loan turns multiple creditors into a single, monthly bill.
Debt consolidation loans can be an unsecured loan obtained from the bank, or if you own a home or car, you can use it for collateral in most cases and obtain a secured debt consolidation loan with lower interest than an unsecured loan. This is because they use your home or car as collateral- and can take the home or car in the event that you don’t keep up with your payments. When to Get a Consolidation Loan A debt consolidation loan is a good idea for most individuals who are having trouble keeping up with excessive credit card debt. A debt consolidation loan will almost always offer a lower interest rate, helping to save the debtor money- but in addition, the loan will be used to pay of multiple accounts and provide the debtor with a single monthly bill instead of each individual credit card bill. It’s important to note, however, that getting a debt consolidation loan to pay off credit card debt is only feasible for individuals who are able to demonstrate self control with their spending and avoid using credit cards in the future. (Or at the very least, avoid spending more than you can afford to pay on a regular basis). Debt consolidation loans can be dangerous for individuals without financial self control, as they will suddenly find themselves with a large debt consolidation loan payment each month in addition to the new debt they may create with credit cards. Benefits of a Debt Consolidation Loan As mentioned, there are many benefits to obtaining a debt consolidation loan. First, and probably most important, a debt consolidation loan allows you to pay off each of your individual credit card accounts (and possibly other unsecured debt). When you make payments on each account individually, you pay an interest rate on each individual balance and less money goes to the principal balance than the interest in most cases. Another benefit is simply moving from having to make 2 or 4 or 6 or more payments each month, to the ability to write a single check each month to the debt consolidation loan for your debts. Makes keeping your check register easier, and helps you manage your finances a little better since you have less to keep track of. Consolidation Considerations Some people have argued against the use of debt consolidation loans that are secured against the debtor’s home. The reason it may not be your best method for paying down debt is because you are creating “secured debt” out of your “unsecured debt”. When you pay off credit cards using a loan secured by your home, it is true that you make your monthly payments more affordable, but you are putting your home at risk. Additionally, you are going to have a long period of time in which to pay off that debt, and theoretically, you could actually be paying more overall even with lower monthly payments, because of the extended period of time you have to repay the money. Debt consolidation loans are often a good answer for helping individuals get their monthly budget back under control, however, it’s important to weigh each of your options carefully before applying for a consolidation loan. Destroy Debt has the advice and resources you need on debt consolidation and other financial topics. http://www.destroydebt.com/sections/debt-consolidation.html |
