First, here's a brief explanation of what a debt consolidation loan is...
A debt consolidation loan is typically a loan of a large amount that is used to consolidate all of your existing credit. The purpose is to pay off all your outstanding debt so that you have just one loan left to pay each month.
Many people have a lot of small loans that they make monthly payments on. For instance, credit cards, car loans or other purchases made on lines of credit. These small loans generally have higher interest rates so that lenders can make a profit during the repayment period.
Debt consolidation loans are larger, and they normally have a lower interest rate, similar to a mortgage loan.
If you have numerous small loans, then applying for a debt consolidation loan may be a good option for you.
The Pros Of Getting A Debt Consolidation Loan:
Because a debt consolidation loan will pay off all of your existing loans, this can be a great way to "wrap" several loans together. By doing this, you are accountable to just one lender rather than four or five (or more), and you make only one monthly payment.
If you are struggling to make all of your loan payments every month, then a debt consolidation loan should help you stay within your budget because the monthly payment will be lower than the total of all of your smaller loans.
The Cons Of Getting A Debt Consolidation Loan:
The repayment period on a debt consolidation loan is usually longer than with smaller loans, so you may pay more money in the long run.
Another problem is that they are often successfully pitched to people who are struggling to pay their monthly payments. You will want to read the fine print very carefully to make sure you are not going to get ripped off by accepting bad terms and conditions.
For example, you will want to ensure that the terms are structured in such a way that if you want to pay off the loan early, you may do so without paying extra fees.
3 Things To Keep In Mind:
Debt consolidation companies have to make a profit just like everyone else. The length of time to pay off your loan may be a long term commitment that doesn't suit your lifestyle. To this effect, it's worth considering whether cutting out unnecessary expenses to pay your current loans is better than spreading your payments out over a longer time frame.
Because consolidation loans are much bigger loans you must be careful with the fine print. Signing up for a high interest rate could mean you end up paying a similar amount to what you were already paying, but for a much longer time period. Make sure the numbers add up for you.
Remember not to make a hasty decision in signing up for a debt consolidation loan. If you have a great credit history and a lot of credit with poor interest rates, then it may be a good solution. However, if you have bad credit, then reacting to your finances with a short term goal may just set you up for bigger debts in the long term.
By: MartiJo Grayson
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MartiJo Grayson is a freelance writer who enjoys helping people get out of debt through her writings. She receives compensation for advertising the CareOne brand of debt relief services based on each qualified consumer who links to the CareOne website directly from our site.
