Consolidation means that your various debts, whether they are credit card bills or loan payments, accumulate into a single monthly payment. If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. However, a debt consolidation loan doesn't erase your debt. Debt consolidation is the process of paying off multiple debts with a new loan or balance transfer credit card, often at a lower interest rate.
Before you apply, we recommend that you carefully consider whether consolidating your current debt is the best option for you. Consolidating multiple debts means you'll have a single monthly payment, but you may not reduce or repay your debt sooner. Payment reduction can come from a lower interest rate, a longer loan term, or a combination of both. By extending the term of the loan, you may pay more interest over the life of the loan.
By understanding how debt consolidation benefits you, you'll be in a better position to decide if it's the right choice for you. To consolidate is to apply for a single loan to repay several loans. On the positive side, this means a one-time payment at possibly a lower interest rate with a corresponding lower monthly obligation. This may give you more room to breathe in the short term, but it could also extend your payment date, increasing the interest you pay over the life of the loan.
So look at the big picture. In a nutshell, debt consolidation combines all your debts into a single payment. When done right, debt consolidation can lower the interest rates you're paying on each individual loan and help you pay off your debts faster. Some financial companies, banking subsidiaries and similar lenders provide unsecured consolidation loans, that is, they lend you money without requiring you to pledge any property as a guarantee that you will pay.
If you have a good credit score, consolidating your credit card debt could be a viable strategy for paying off debts. But consolidation loans are not without problems. The interest rate on these loans can be astronomical, especially if you don't have good credit, often reaching 36% or more. Lenders could also charge fees, which can bring the effective interest rate closer to 50%.
Even if you get a good promotional launch rate, the rate could go up over time. You will probably have to pay the debt longer than you would otherwise have to pay and possibly pay more interest than if you had stayed with the original creditor. Also, getting this type of loan doesn't help you change the spending habits that led you to have debt problems in the first place. If you're thinking about ways to better manage your finances, such as filing for bankruptcy or trying to pay off your debts for less than you owe, you might also want to consider debt consolidation.
With debt consolidation, you get a single loan to pay off several other loans, leaving you with just one monthly payment instead of several. In theory, making a payment to one creditor each month will be easier to manage than paying several different creditors. You may let down your guard and incur additional debts before you have paid off the consolidation loan, starting the cycle all over again. Similarly, paying off credit cards and other lines of credit with a debt consolidation loan can create the illusion of having more money than you actually have.
This way, you can reap the benefits of a debt consolidation loan and avoid the extra interest. Debt consolidation can help your credit if you make payments on time or if consolidation reduces your credit card balances. Secured loans often have lower interest rates compared to unsecured loans and credit cards, so you could save money on interest payments by consolidating through a secured loan. When you consolidate debt into a new loan or credit card, you free up space on your existing credit cards that you can use to buy even more things.
Consolidation could end up costing you more money, and another option might be better suited to your situation. If your credit score has improved since you applied for other loans, you may be able to lower your overall interest rate by consolidating your debts, even if you have mostly low-interest loans. When looking for a lender, make sure you understand the true cost of each debt consolidation loan before you sign on the dotted line. To consolidate your debt, you get a single loan to pay off your other loans, allowing you to make only one payment to a single creditor each month instead of making multiple payments to multiple creditors.
While a debt consolidation loan may initially lower your credit score slightly, as you will have to conduct strict credit research, over time your rating is likely to improve. To help you decide if debt consolidation is the right way to repay your loans, we'll show you the advantages and disadvantages of this popular strategy. . .