If you are struggling to make your minimum monthly payments on several different credit cards or if you are having a difficult time keeping track of whom you have already paid this month, then a consolidation loan may be a good option for you. Companies and banks are willing to allow you to pay off several small loans with one large loan, which gives you one monthly payment to manage.
Credit Consolidation
Credit consolidation works by using a larger loan to pay off several smaller loans. Often the consolidation loan will have a lower interest rate than the smaller loans. It makes it easier to manage the payments since you only have one small monthly payment to make. Consolidation loans may offer a fixed interest rate that is lower than credit card rates.
Benefits and Risks
Credit consolidation can lower your monthly payment, by allowing you to stretch the loan over a longer period of time. It offers a set monthly payment, and many have a lower interest rate than a credit card. Often the interest rates are set, instead of being based on market conditions. These features make a consolidation loan appealing to someone who is overwhelmed by the debt they are currently dealing with. However, unless you look at the spending habits that caused you to acquire all of the debt, you may end up in the same position in a few years. When you take out a consolidation loan you need to stop using your credit cards. Using a home equity loan or taking out a second mortgage will put your home at risk if you default on the loan for any reason.
Finding a Consolidation Loan
You can get a consolidation loan through your bank or credit union. Although other companies offer consolidation loans online or through the mail, you will generally find better terms at a bank. Credit card companies may also offer a consolidation loan to help you get control of your credit card debt. You can contact a loan representative at your bank to begin the process of a consolidation loan, or you can apply online. Be sure to read the terms of the loan. A set interest rate is better than a variable interest rate. The longer the term of the loan the more you will pay in interest, so you should choose the highest monthly payment that you can afford.
Alternatives to Consolidation
Credit consolidation is not the only way to get your debt under control. You can set up your own debt payment plan and budget to get out of debt. In your budget you should find extra money each month to put towards your debt. Then list your debts in order of interest rate and apply the extra money to the first debt on your list. When that is paid off move to the next debt. Other options include going to credit counseling or trying debt settlement, although both of those options can negatively affect your credit score.
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