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Published On: Wed, Jul 17th, 2019

Debt Consolidation Loans: What You Need To Know

If you find yourself buried in debt with few options to dig yourself out, now might be just the time to consider a debt consolidation loan. You have heard the phrase ‘debt consolidation’ begin featured in television ads or seen it mentioned in the classified section of your local newspaper but not understood exactly what it is or how debt consolidation can help you to deal with your debt. For those who are unacquainted with this financial tool, it can often seem confusing and the details can appear complex but nothing could be further from the truth.

photo/ Michael Jarmoluk via pixabay

While debt consolidation loans can differ depending on which financial institution you choose to acquire them from, they are broadly similar in principle. If you are new to this type of financing, it is important to take the time to gain a little background, to better understand the basics of debt consolidation loans and what this type of financing can do to put you back in control of your finances.

Let’s take a closer look at some of the essential points behind debt consolidation loans, what they are, their advantages and disadvantages and how they can help you.

What Are Debt Consolidation Loans?

These days, it is common for consumers to owe money to a variety of different lenders such as financial institutions like banks, credit unions or other loan providers. Debt consolidation is simply the process of taking out a single (additional) loan from a financial provider, which is then used to repay all of a borrower’s debts. In doing so, the borrower is left with a single loan to repay that represents the cumulative amount of all of his or her other loans. The debt is now considered “consolidated”.

What Are The Advantages?

The biggest advantage of a debt consolidation loan is that it can often be secured at a much lower interest rate than some of the debtor’s current outstanding loans. In other words, you might find that you can save money in the long run by choosing to consolidate your debt and pay lower overall interest charges by the time you have eliminated your debt.

Another advantage of debt consolidation loans is that they reduce the number of monthly payments that must be handled each period. While the total amount of what you must pay each month may not drastically differ, from a logistical perspective it is much more straightforward to pay back one bill per month rather than run the risk of forgetting one payment when you have many creditors to consider. Missing payments to any creditor can wreak havoc on your credit score. While your overall debt will not be explicitly reduced with a debt consolidation loan, acquiring this type of loan can set you up for improved financial health as time goes on.

Finally, debt consolidation loans are usually offered with a longer repayment window than typical creditor arrangements. While longer repayment periods can imply more overall interest will be paid in the long run, this can be a good choice for those who want to minimise their monthly payments. 

What Are The Disadvantages?

The only disadvantage of a debt consolidation loan generally is generally related to the terms of the loan you are considering. Since these types of loans are usually targeted at those who are in a precarious financial situation already, the fine print of some of these agreements can include some nasty surprises for those who do not do their homework. While reputable financial institutions can usually be expected to give reasonable offers, make sure that you fully understand the terms of any debt arrangement before you agree to it.

Are Debt Consolidation Loans Right For Me?

If you are in a tricky financial situation and are having trouble meeting your monthly payments to many creditors, a debt consolidation loan can be a positive strategic choice. Keep in mind that your debt will still need to be paid off and there is no easy way out to do this quickly. Be sure to speak with a financial advisor to get more specific advice about debt consolidation loans and whether they are right for you.

Author: Caitlyn Bell

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