Debt consolidation loans can be used to lower your monthly payment and to lock in a lower interest rate. While there are advantages of debt consolidations loans, they can be dangerous if you do not manage your money wisely. There are several different types of consolidation loans to choose from.
Debt Consolidation Loans
A debt consolidation loan is a loan you use to pay off several smaller loans. The smaller loans are put into one larger loan with different terms than they originally had. People will often consolidate credit card loans with high interest rates with a consolidation loan that offers a lower interest rate. The terms of the loan can be adjusted and the monthly payment may be lower than the combined payments of the previous loans. A consolidation loan may be a signature loan with no collateral, similar to a credit card, or a consolidation loan can be tied to a home, a vehicle or something that is of value. Additionally you may have the option consolidate your student loans through the federal government.
Debt Consolidation Loan Benefits
One benefit of a debt consolidation loan is that it can lock in a set interest rate. It also gives a definite timeline for paying off the loan since the payments are set with the end of the loan in mind, unlike a credit card. It can lower your monthly payments if you are struggling to pay just the minimums on your credit cards, but the lower the payment, the longer the term of the loan and the more you will pay in interest for the loan.
Debt Consolidation Loan Dangers
One danger of a debt consolidation loan is that many people continue to use their credit cards after they have paid off the balances. After a few years, they may have run their credit cards back up and have a difficult time making the payments in addition to the debt consolidation loans. Another danger is choosing a loan that uses your home as collateral. If you cannot make payments on that loan, you could lose your home. However, if you miss credit card payments, your home is not in danger of being repossessed.
Choosing the Right Consolidation Loan
When choosing a consolidation loan, shop at several different banks and credit unions to find the lowest interest rate available. Be sure you go with a bank that you recognize and has a good reputation. Many banks that advertise consolidation loans in the mail or on television have poor terms and high fees. Do not roll a loan with lower interest rate into a consolidation loan with a higher interest rate.
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