What Does a Debt Consolidation Loan Do for You?

Debt consolidation loans are one of several debt management tools of which you may choose to avail yourself. This type of loan allows you to make one monthly payment to settle your debts instead of paying several creditors each month to keep current with all your debts. This kind of loan can either help or hurt your financial situation, depending on the terms of the loan.

Resolve Credit Problems

If you have poor credit due to being behind on several debts, consolidating your debts might help you to resolve the credit problems. Under a debt consolidation plan, a creditor pays off a number of your debts and you then make one payment to that creditor each month until you have paid off your debt. This can help raise your credit score if you make the consolidation payments on time.

Warnings

Debt consolidation is not an easy fix for your credit problems, however. You still must make payments on time to preserve your credit, and you may end up paying high interest rates for your consolidation loan as opposed to paying lower interest rates on several loans. In addition, if you use your home as collateral for a consolidation loan, you risk losing it if you cannot make your payments on time each month.

Alternatives

If you do not want to consolidate your debts, you may consider filing for bankruptcy. While bankruptcy negatively affects your credit for several years, it offers you a chance to start over if your debt is overwhelming you. You also may consider negotiating individually with each of your creditors to obtain lower interest rates or monthly payments that you can better afford. Finally, you may be able to refinance some debts, such as mortgages or auto loans, without affecting the rest of your debts.

Best Types

MSN Money reports that taking out a home equity loan is the best type of debt consolidation program. This type of loan uses your home as collateral, so make sure you are able to pay before you take out a loan. However, home equity loans offer lower interest rates than most other loans, and you may be able to deduct your interest payments from your taxes. If you cannot afford a home equity loan, consider using a reputable debt management service to handle your consolidation so that you can get the best rates available.