Planning for Debt Consolidation Loans

Having a large amount of debts–if it’s credit cards or personal loan payments–can make it really difficult to track your balances so you know what you owe and how you can pay them down as quickly as possible. It’s not only costly, but debt is also dangerous when it comes to your credit score. If you owe 30% or more on your credit card limits or those debts have caused you to miss multiple payments, your credit score will most likely suffer. Researching debt consolidation loans is probably in your best interest if you want to get serious about getting your debts under control. Read on for more information about debt consolidation loans!

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The Skinny on Debt Consolidation Loans

Debt consolidation loans work by combining multiple unsecured debts into one single loan that could mean lower interest rates and lower monthly payments. Instead of paying each of your creditors out from your account, you pay one payment to your debt relief profession every month and your individual creditors are paid that way. These debts don’t disappear with debt consolidation loans: they simply transfer over to a different lender or loan type. You typically have to pay debt consolidation loans off within three to five years’ time. If you owe $10,000, receive frequent phone calls and correspondence from your creditors or you’re just have general difficulties making the payments, it might be wise for you to look into debt consolidation loans. In time, this kind of loan could also improve your credit if you pay your balance off sooner than later.

The Potential Downsides

While it’s certainly true that debt consolidation loans can offer great relief for the consumer, there are also some downsides that are worth mentioning.

  • One of the biggest downsides is the higher interest rate that come into play. Even if the interest rate is very reasonable, lower monthly payments usually indicate a situation that will have you paying back your loan over a longer period of time. In turn, you’ll end up paying more in interest over the duration of the loan period. Communicating with your lenders directly before making any rash decisions is best. Find out just how long it would take to pay down the debts on all your cards at their current interest rates. Then compare the length of time and cost that go with debt consolidation loans. Missing a payment could hefty fees and penalties or a higher interest rate.
  • It’s no big surprise that a debt consolidation loan showing up on your credit report would bring your score down. Lenders that come across a consolidation loan on your credit report take that as a sign that you’ve racked up debts that you can’t properly manage without said loan, so it gives them reason to be weary. And if you miss a payment on your consolidation loan, that information will be noted on your credit report as well.

Finding the Right Loan

If you have a strong history with your bank, credit union or card provider, you should go to them first for a consolidation loan. If you happen to get turned down by your first choice organization, you can go to private companies and lenders: they’re generally set up with less strict rules and guidelines. Avoid getting a debt consolidation loan on a new credit card. The fees associated with these services are generally a nice percentage of the amount being transferred.

Debt consolidation loans can afford you the opportunity to cut down on the amounts you owe every month, but it’s up to you to keep up with your debts. If you drop the ball and just so happen to start spending outrageously again, you could be opening up a world of pain and stress that you don’t want to have to face unnecessarily. If you still need some time to figure out if debt consolidation is the right thing to do, it would probably be wise to sit down with a credit counselor or financial advisor to discuss your unique situation and you want to be sure you’ve found the right company to deal with. Going with a debt consolidation loan is a huge step, and you should read through all of the fine print to be sure you understand what’s going on.

The most important thing to remember is that you must be in the right place and time to seriously consider a debt consolidation loan. It’s not in your best judgment to take on the first financial advisor you find at some hole-in-the-wall firm. You want to make an informed decision about the kind of loan you’re taking on, and you have to be able to bear the weight for a long while before you can get back to a clean slate. Your credit score will suffer for some time, but there’s a light shining through at the end of the tunnel!