There’s little doubt you’ve heard the term before. Even those without any financial difficulty have come across utterances about consolidation loans and their purported ability to help those with debt manage it better. If you happen to be in the unfortunate situation of excess debt, you might have done some digging yourself trying to learn more about if they’re appropriate for your situation.
Just because you’ve heard of them, though, doesn’t mean you know exactly what they do, and if you’ve ever been curious about how these loans function or why people consider them, we’re going to dive into that today. Hopefully, this knowledge will provide some insight that will help you come to a decision about whether or not they might work for you.
Debt Consolidation In A Nutshell
For the most straightforward description, we’ll turn to the gurus over at Investopedia:
“Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms.”
Going a bit deeper, we can determine what those more favorable terms consist of. Generally speaking, any form of debt consolidation worth your time will provide you with a lower interest rate, lower monthly payment, or both (if you’re lucky). Why would this come in handy?
Consider a situation in which you’re struggling with costly minimum monthly payments that are too high for you to manage. You keep missing payments, can’t catch up, and go off the rails fairly quickly. To counteract this, a lower interest rate and different loan repayment terms might help get those payments to a manageable level that will allow you to make them on time.
Furthermore, you might have trouble with debt just because you have so many bills to keep up with, you forget about them all. By consolidating into a single loan, you’ll simplify what you have to keep track of and make it easier to meet your obligations. When you can focus on just one payment, it provides a psychological boost that is beneficial in pulling yourself out of debt.
Whether or not this is the right path for you depends on a host of personal factors, but if it makes sense and reduces your payments, then most people will then consider their different options for achieving debt consolidation, one of the most common being the debt consolidation loan. Let’s explore.
Debt Consolidation Loans In Greater Detail
You might be aware that debt consolidation loans are but one form of debt consolidation, but are one of the more widely offered because of the fact they increase the chances of a creditor getting paid their money from a debtor. The source might vary—bank, credit union, debt-consolidation service—but the basic details remain the same.
Debt consolidation loans can be further parsed into two main varieties—the secured loan and the unsecured loan. If you know anything about personal loans already, then you probably correctly guessed that secured debt consolidation loans are backed by an asset from the debtor to use as collateral.
Unsecured loans have no such collateral backing them, and as a result might have higher interest rates, lower minimum amounts, and, unsurprisingly, are more difficult to obtain.
Terms on secured and unsecured loans might differ, but they often run the course of five years. Interest rates can also vary, but it’s usually best for prospective borrowers to obtain fixed-rate loans with the lowest amount to avoid paying more than they would if they simply continued paying down their credit card debt.
It’s important to note that debt consolidation loans don’t get rid of your debt (it still factors into your credit score, for instance). They do, however, make it more manageable by cutting down the number of creditors you’ll have to deal with. In conjunction with other methods to help get debt reduced and ultimately paid off, these can help individuals improve their financial situation in a rapid order.
Most of the time, these loans are most advantageous for those with many debts or a large debt with a high total dollar amount (one that exceeds $10,000). If you’ve been having difficulties with payments and need relief from collection agencies, a consolidation loan can often do the trick.
The thing to remember with loans, though, is to consider the source. Taking loans from disreputable lenders is a great way to get caught in a scam, so always remember to do your research and follow up on who you’re dealing with before you make any moves.