What Are Debt Consolidation Loans?
A debt consolidation loan is a new loan used to pay off multiple smaller loans (typically credit card accounts and consumer loans). They can be helpful to a small handful of individuals who have more debt than they can handle, but who have less than an overwhelming amount of debt. If executed correctly, a debt consolidation loan can secure a lower interest rate or secure a fixed interest rate. If you are considering a debt consolidation loan know this: consolidation loans can affect your ability to discharge debts in bankruptcy, so the decision to consolidate must be weighed with awareness. Often times these loans can have a higher Adjusted Periodic Rate than any of their interest rates combined, leaving the individual in more debt than with what they began. Another requirement for these loans is to put assets up for collateral such as a home, rental property, business, car, or savings. Thus, there is more risk and less guaranteed success associated with these programs.
Advantages Of Debt Consolidation Loans
Debt consolidation loans have a few advantages:
- They can offer a fixed monthly payment – This will help keep control of your finances and allow you to plan for the future. You will in effect be able to control you debt more, instead of debt controlling you.
- Lower interest rate – Payday loans, credit cards and short term loans like these generally all come with a high rate of interest, by switching to a debt consolidation loan you can cut these interest charges into one smaller interest rate, saving you money.
- Less stress – By combing all of your small debts into one larger, but more manageable debt, can actually reduce your stress levels. Trying to keep track of 5, 10 or more small debts can be stressful – when to pay them, how much, your cash flow etc. With one debt to pay each month it is much easier to be in control of your finances and organize your debt.
Disadvantages of Debt Consolidation Loans
There are also some negative points to debt consolidation loans that you need to be aware of:
- Takes longer to get out of debt – These loans often require a longer repayment period to allow you to afford the monthly payment.
- Cost more – Adding on to the above point, this can allow you a lower monthly payment, but cost you far more in the long run over the life of the debt consolidation loan. The added cost is hidden in the additional interest paid over an extended period of time.
However, everyone’s personal circumstances are different and these points raised above may not be applicable to you. You should consult with a debt consolidation expert knowledgeable in all your available options before making your decision.
