The Truth About Debt Consolidation Loans

The truth about debt consolidation
A debt consolidation loan is a double-edged sword. It may be advantageous but it also poses a risk for whoever takes them. Read on to find out if a debt consolidation loan is the right thing for you.

Let’s try to define what a debt consolidation loan is first. In a nutshell, a debt consolidation loan is a loan of a very large amount that will be used to pay off all your existing debts. This way, you only get one big loan instead of several small debts that you need to pay every month.
You must remember that having small loans is of the ordinary nowadays. People make monthly payments for car loans, credit cards or other types of credit. We should also be aware that small loans have very high interest rates compared to larger loans. This is to ensure profit for the lender during repayment.
A debt consolidation loan is virtually larger but the interest rate is comparably lower. It is just like those regular secured loans from banks. One example of this is a mortgage loan.
For people who have quite a number of small loans, a debt consolidation loan might just be their golden ticket.

The Advantages of A Debt Consolidation Loan:

As mentioned above, a debt consolidation loan is designed to pay all your existing obligations. Due to the nature of the loan, it becomes a good way to “wrap” all you outstanding loans together. Simply put, you only have to answer to one lender now instead of having to answer six or ten lenders. Also, the benefit of doing only one monthly payment is not to be overlooked.
If you are having trouble making ends meet when payment days come, a debt consolidation loan can really help you stick to your budget. Take note that your one-time monthly payment for the consolidated loan is smaller compared to the total of all your smaller loans.

The Disadvantages of a Debt Consolidation Loan:
A debt consolidation loan has a longer repayment period compared to the smaller loans. In the long run, you will end up paying more.
. Like all loans, never get too desperate and jump the gun right away. Consolidation loans target people that struggle to pay their monthly dues. Understand the fine print and make sure that you fully agree with the terms and conditions provided by the contract. One such term that might be of use is the possibility to pay off the loan earlier than usual without suffering any penalties or fees.

3 Things you need to Remember:

Companies offering debt consolidation loans are businesses so they are looking for profit. The time required to pay off a consolidation loan makes this product a long-term commitment and it might impact your lifestyle. You must weigh whether cutting out extra expenses would not be a better option compared to making a consolidation loan and extend payments over longer periods.

Be careful at the fine print. Consolidation loans are usually very large loans so you need to be aware what you are agreeing to when signing them. Make sure you properly add up the numbers. You never know if the company is ripping you off and you end up paying the same amount you were already making but the time period gets extended.

Think clearly and consider all necessary factors. For those with good credit history and a lot of loans with high interest rates, a consolidation loan might be an answer. But for people with bad credit, the higher interest rates associated with poor credit rating might drag you into another hole.

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