How Do Debt Consolidation Loans Work?
Posted on | December 24, 2009 | No Comments
Debt consolidation loans are an extremely common way to tackle debt problems, but this is often because they are the only option that some people are aware of for dealing with debt. The idea is that you take out one big loan to pay off all your other debts, leaving you with only one affordable monthly payment to think about. While they do have their place, and can be a good option in some circumstances, it is far more likely that they are not the best solution for most serious debt situations.
When you think about it logically, how reasonable do you think it sounds that the best option for solving a problem caused by borrowing lots of money is going to be borrowing even more money? It is rarely a wise thing to do, but it feels right to many people because of the immediate gratification of only having one lower monthly payment to think about.
The reason the monthly payment is lower is almost certainly because the new consolidation loan is spread over a much longer period than most of the original debts. In many cases, if you work out what you will be paying back in total over the term of the new loan, compared to what you would have paid in total for the original debts, you will find that you end up paying far more through the new loan.
The only time a debt consolidation loan might be a good thing to do is when your debts are relatively small and they are at a high rate of interest. When interest rates go down it is perfectly possible that you may be in a position where you can get a new loan that will enable you to pay off some debts which are at a higher rate of interest. The thing to be careful about is that you only take out a big enough loan to repay the things that are at a higher rate of interest, because the lender will probably try to get you to take enough out to cover all your debts.
There is a simple way to ensure that you use a consolidation loan appropriately. Draw up a list of all your debts, and put them in order of the interest rates you are paying, starting with the highest at the top of the list. Draw a line through the list at the point that corresponds with the interest rate of the new consolidation loan, and only take out enough to cover the debts above that line.
Before applying for a debt consolidation loan it is worth reading about the various other ways you can deal more effectively with different debt situations. You can get free help with debts on the author’s website, which includes advice on debt management plans, debt settlement, bankruptcy and all types of borrowing.
Guest Author: Keith Garrow
Comments
Leave a Reply