Debt consolidation loans are available from most banks and some independent lenders. These loans pay off most or all of your debts so you have only one payment a month to handle. This shouldn't be confused with debt management, in which you pay a company a fee to pay your individual creditors without a loan. Lenders often give ambiguous explanations of what happens after consolidation, instead explaining what the benefits and drawbacks are.
Payments to Creditors
Once you consolidate your loan, you will have enough money to pay off selected debts. In some cases, the lender handles paying off your creditors for you, but in others, they simply transfer money to your bank account so you can distribute funds yourself. Paying off creditors with the loan money means that, after consolidating, you won't have as many creditors to pay each month. However, consolidation does nothing to reduce the amount of debt you owe, because you still owe your new lender for the consolidation loan. It is the organization consolidation offers that assists many people in getting finances under control. As a condition of getting the consolidation loan, some lenders require you to take debt management classes or counseling, so you may need to leave room for this on your calendar.
Payments to Lender
Debt consolidation does not erase your previous debts. It merely transfers them to one new lender. Once you consolidate, you are obligated to begin paying your new lender in the same manner you paid your old creditors. Usually, payments are monthly and are scheduled for roughly the same day each payment period. However, some companies allow for multiple payments per month, typically bimonthly. Some lenders charge fees for paying extra on your loan each billing cycle. In general, consolidation loans will take you longer to pay off than paying your debts without consolidation. Spreading the loan out is how the lender can manage to offer you lower interest. You probably will need to restructure your monthly budget and long-term financial plans to accommodate this.
Impact on Credit
The Home Buying Institute and Bankrate websites assert that, after consolidating your debts, your credit usually isn't impacted significantly. The real issue with credit after consolidation is that some lenders look at the fact consolidation loans are in repayment and assume you can't afford to take on more debt. Additionally, because you close many accounts by paying them off with the loan, you end your history with previous creditors, which other lenders may not see positively. This may make it a little trickier, although not entirely impossible, to get credit, particularly credit with good interest rates. If you want to consolidate, keep at least one or two debts out of the consolidation so you can preserve some of your credit history.
Defaulting
After consolidation, most of your credit eggs are in one basket. If you fail to make a payment, your new lender can take legal action against you to collect what you owe. If you are in danger of default after consolidating, talk to your lender right away to see if you can work out alternate arrangements. The worst thing you can do is ignore notices of late payments or default. It's always better to show the lender you're proactive about your debts and want to pay.
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