A debt consolidation loan is a personal loan (usually) that allows you to pay off multiple debts without having to declare bankruptcy. Consolidation is the process of combining several of your existing loan payments into one easy-to-manage loan. You may, for example, have multiple high-interest debts (such as credit cards and a mortgage) that you wish to simplify. A debt consolidation loan allows you to take out a personal loan, use it to pay off your debts, and then pay back the interest on this single loan over a fixed timeframe, at a fixed interest rate.
If you get a good debt consolidation loan, it will mean that you will pay less in interest every month. This is simply because you will accrue less interest overall, and will effectively reduce the amount you spend over the lifetime of your loan.
Debt consolidation is easier and more manageable than paying off multiple debts every month, which is why many people opt for it. Instead of writing multiple checks to various lenders at the end of the month, you write one all-encompassing check to the bank or institution that granted you the loan. This makes your debts and finances much easier to anticipate and organize. Because these loans are essentially personal loans, they also allow you to know exactly how much money you will be paying back every month, and exactly how long you will be paying it back for.
When shopping around for a debt consolidation loan, you should treat it like a personal loan. Keep the APR in mind, including any fees, and be sure to check whether your lender of choice charges you origination fees, pre-payment penalties, or any similar insidious charges.
Those considering debt consolidation loans should calculate the average amount of interest and payments that they are required to pay on their multiple debts every month. There are numerous online calculators to help you with this. Then, shop around for a debt consolidation loan with a lower interest rate and affordable monthly payments. If you are successful and find one, then you will effectively be clearing away your multiple debts and getting a single one with an affordable interest rate and monthly payments! Just be careful not to rack up debt again on your credit cards etc. as this will undo all of your hard work.
Debt consolidation loans are a brilliant way of preserving your credit score, something that many people are concerned with. Missing multiple loan payments or declaring bankruptcy will inevitably hurt your credit score, and a debt consolidation loan is a great way to keep it intact. The fixed nature of these loans is also beneficial for you and your credit score, as it provides you with an “installment” trade line for your credit report, which showcases your ability to pay regular amounts of money monthly, and can slowly increase your credit score.