What Is a Debt Consolidation Loan and How Do You Use It

What Is Debt Consolidation?

First Published Date : November 10, 2011 ADawnJournal.com

A debt consolidation loan is a loan to consolidate all your debts into one single loan and one payment. For example, let’s say you have four credit card balances, two retail store credit card balances, and other consumer loans for which you pay several monthly payments to each of these loan providers. A debt consolidation loan would pay all these loans and you are left with one single payment – which would be a lot less headache and a better money management option to handle your daily finances.

Advantages of a Debt Consolidation Loan

Lower Monthly Payments – If you were previously making 10 payments , making one payment will likely lower your monthly payments.

One Single Monthly Payment – You will be saving time and hassle by making one payment every month instead of many payments.

Save Money on Interest – Interest charged by your loan provider will be lower than those of your credit card or store card loans, thus saving you a lot of money on interest.

Disadvantages of a Debt Consolidation Loan

Further access to credit – A consolidation loan will free up your credit or store cards and you will have access to more credit than before. If you are not able to control yourself, you will likely end up sinking yourself more into debt.

Collateral – Your financial institution may ask you to provide some sort of collateral against your consolidation loan.

A longer term – Because you are dealing with one large payment, your payment term will be longer and it will take you more years to payoff your loan in the end.  

A Few Things to Remember

– Don’t forget that not all debts are eligible for a debt consolidation loan. An example would be your existing mortgage. Your financial institution where you are obtaining this loan from will be able to tell you what types of loans are eligible and what types of loans aren’t.

– Also, you may not be eligible to obtain a debt consolidation loan if your credit score and other circumstances do not meet the requirements of your financial institutions’ eligibility criteria.

– Don’t forget to make a list of your all outstanding loans and take this list with you when you visit your financial institution.

– Don’t take your consolidation loan before checking with a few financial institutions. If you shop a few of them, you are likely to find a better rate then just taking it from the first institution you walk into.

If you can discipline yourself to not wrap yourself up with more loans, a debt consolidation loan is worth considering and it is your first step to take control of your personal finances and walking out of debt.