How Do Debt Consolidation Loans Work?

What Debt Consolidation Does

Debt consolidation takes into account all of your debt with the exception of your mortgage. This can be credit cards, car loans or personal loans. You may have bought furniture on credit or a boat or camper. You can take all of these loans and combine them into one, with a lower interest rate than you are paying on each one separately and usually for a longer term, creating one lower payment. You can put all or some of the loans into a debt consolidation loan. There are times when it doesn't make sense to put a debt in--if it has a lower interest rate than the consolidation loan or you don't have much longer to pay on it.

The Types of Debt Consolidation Loans

There are many types of debt consolidation loans, most of which are mortgages and will attach to your home. Depending on the equity in your home, you can refinance your first mortgage and add all the debt into it. If you are paying an average of 19 percent on your loans and can get a first mortgage with an interest rate of 7 percent, you can make the payment more manageable. You can also apply for a second mortgage or a home equity line of credit, called a HELOC. There are some personal loans out there for debt consolidation, but without collateral you will pay a much higher interest rate.

Where You Can Get a Debt Consolidation Loan

You can apply to the bank that already holds your first mortgage. If your credit rating is good and you've kept up with your mortgage payments, it may be easiest to go through them as they have already done your qualifying. They will update everything from when you first got a mortgage with them, but it will move a little faster. You can apply at any bank or mortgage company. A mortgage broker works with several different companies and can put you with the one that best fits your needs. Some of the larger credit card issuers, such as Capital One, will do loans and consolidate other debt into it if you have a good record with them. If you deal with a local savings and loan on a regular basis, they may consider making you a personal loan.

Why Should You Get a Debt Consolidation Loan

The biggest reason for people getting a debt consolidation loan is that it has become difficult to make all the payments on their loans. By putting them all into one loan and amortizing it for 15, 20 or 30 years, they have a lower payment that they can easily pay every month. This does not mean you will save money. You may have a higher interest rate on a credit card, but by paying extra every month you can pay it off in 6 months. If you put that balance into a debt consolidation loan, you will be paying on it for years. Even at a lower interest rate, that can add up to much more money. The best thing to do is keep out anything you know you can pay off quickly. Take as much extra money from your monthly savings with your new debt consolidation loan and pay on the equity. You can cut the time it takes to pay it off in half and save yourself thousands of dollars.