Debt Consolidation Loans

Managing a lot of bills can be difficult, so borrowers often look to debt consolidation loans to help them get back on track. Debt consolidation loans lump all your bills together into one big loan so you only have to worry about one simple payment.

People use debt consolidation loans...

  • To avoid the difficulty of managing multiple bills
  • To avoid late fees and late payments due to an overwhelming number of bills
  • To consolidate their bills into a loan with a lower interest rate
  • To enjoy the perks of keeping track of just one payment

When you’re struggling to stay on top of everything, it can be easy to fall behind. If you’re approved for a debt consolidation loan, you can use the funds to pay off all your bills so you only have to worry about one bill thereafter.

Debt Consolidation Loans are Long-Term Loans

Since debt consolidation loans are long-term loans, you have more time to pay down your debts, so your monthly payments can be considerably lower.

The down-side of a longer term means that you will be paying out interest for a longer period of time. Even if you obtain a debt consolidation loan with the same interest rate as the loans you’re consolidating, paying interest on the loan for a longer period of time will result in a more expensive loan.

Low Interest Debt Consolidation Loans Best

If you can consolidate all of your debts into a loan that has a lower interest rate than the other loans, you can save money. A lower interest rate can lower your payments, not only making your debt more affordable, but also making it easier for you to stay within your budget.

Once you’ve mastered your budget and have a little extra money, you can pay more towards your debt consolidation loan so that it’s paid off sooner! Paying down your debt consolidation loan quickly will save you money - money that would have gone toward interest charges.

Sometimes people look for debt consolidation loans because they are already struggling with their bills. If these struggles can be seen on your credit report (such as late payments or large amounts of debt), you may not be able to obtain the low interest rates you were counting on.

Of course, if the interest rate offered is higher than your other loans, a debt consolidation can end up being more expensive. You may decide that you’d rather hold onto your lower interest rates and get organized.

Debt Consolidation Loans: Unsecured and Secured?

Debt consolidation loans can either be secured or unsecured loans, and there are pros and cons for each.

Secured Debt Consolidation Loans

Secured loans are loans that require collateral to guarantee the loan. Collateral is anything of value that the lender will take possession of if you do not repay your loan. Car loans and home loans are examples of secured debt, because if you do not pay your loan, lenders can repossess your car or foreclose on your home. Since lenders have this added guarantee that you will repay your loan, interest rates are often lower for secured loans.

Secured debt consolidation loans are often tied to your home with home equity lines of credit or second mortgages. The interest rates offered for these types of loans are often much lower than the rates associated with unsecured debt consolidation loans, which is a plus. In addition, the interest paid on home equity lines of credit and second mortgages can be tax deductible, which may lower the amount of taxes you owe.

Unfortunately, if you default with a home equity line of credit or second mortgage loan, you risk losing your home. It’s important to be realistic about your ability to pay back your debt before you attach it to your home.

Unsecured Debt Consolidation Loans

Unsecured loans do not require collateral, so lenders have to trust your promise to repay. Relying on your word alone makes the loan a bit riskier, so interest rates are often higher for unsecured loans.

Unsecured debt consolidation loans do not require collateral, so they will have higher interest rates than rates offered for secured debt consolidation loans. The benefit is that unsecured debt consolidation loans are not tied to your property, so you don’t have to worry about losing valuables in the event you fall behind. Unsecured debt consolidations are also an option available for people that do not have property to secure the debt consolidation loan.

Debt Consolidation Loans Improve Your Credit?

It’s hard to say if debt consolidation loans improve your credit, since there are so many varying factors involved. 30% of your credit score is based on how much debt you owe (on revolving lines of credit, like credit cards), so if you use a debt consolidation loan to pay off your bills, you lower the amount of debt owed considerably. But the type of credit you use makes up 10% of your credit score, so only using an installment loan (a loan with set payment, as opposed to revolving lines of credit) can affect your score, too.

Then you have to consider how you handle your debt and whether the debt consolidation will alter your credit habits. Payment history accounts for 35% of your credit score, so consistently making late payments will negatively affect your credit score. If a debt consolidation payment will make it easier for you to make payments on time, it may help your credit.

Debt Consolidation Loans Leaves Room for Relapse

Now it’s time to consider how you managed to accumulate so many bills anyhow, because a debt consolidation loan won’t fix your credit habits. If you used credit cards or loans because you could never stay within your budget, ask yourself why.

Using a debt consolidation loan to pay off your debts will free up your credit cards so you can charge them up again. You want to make sure that you have enough discipline to not rack up more debt after using a debt consolidation loan, otherwise you may find yourself in twice as much debt as you started with.

Compare Debt Consolidation Loan Costs

Debt consolidation loans can save you money if you do your homework. You may be charged with fees and lenders can offer different interest rates. Shop around and compare the interest rates and fees offered by various lenders. When you find the cheapest debt consolidation loan offer, compare it to the current cost of your bills and determine if it will save you money. Gather as much information as possible so that you can make an informed and sensible decision regarding your debt consolidation loan.