Some credit card users look to consolidation loans as a method to get control of their credit card debt. While consolidation loans can be helpful, they can also be very detrimental and lead you to more significant debt problems. Get advice from a credit counseling service in your area if you're not sure how debt consolidation works and what potential impact it has on your finances.
How Does Debt Consolidation Work?
With debt consolidation, you take the money from a new loan to pay off your old debts. By doing this, you eliminate the payments you have to make to multiple other creditors and instead pay only your new creditor. As with any other loan, you have to apply for the consolidation loan and repay it with monthly installment payments. These loans come in several different varieties, but the key is that you borrow money from one lender to pay back other lenders.
What Consolidation Plan Is Best for Me?
If you have decided to take out a debt consolidation loan, you have to evaluate the loan based on both its terms and your ability to pay. For example, if you want to consolidate several credit cards and know that you will be able to pay the total amount back within 12 months, a balance transfer that charges you no transfer fee and 0 percent interest for 12 months is ideal. If you know you won't be able to pay it off that quickly, a loan that offers you low interest rates over the length of the repayment period might be better.
Will My Monthly Bills Be Lower?
One of the key benefits and enticements offered through a debt consolidation loan is the opportunity to pay less money each month than you would have under the loans you consolidate. Consolidation loans allow you to do this because they typically extend the number of payments you have to make over the life of the loan. In the long run, however, these extended payment periods will end up costing you more money, even though you pay less each month.
Will Debt Consolidation Help Me Get Out of Debt?
Whether a debt consolidation loan helps you get out of debt depends on several factors. While a consolidation loan may make it easier for you to make your monthly loan payments, the loan itself does nothing to decrease the total amount of debt you have. You must still repay the loan. If you are unable to maintain financial discipline and use the consolidation loan as a means of spending more money instead of repaying the loan itself, you can quickly fall into even more debt problems than you had before.
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