What Are Debt Consolidation Loans?
A debt consolidation loan is simply one loan that is used to pay off your other smaller loans. By combining your small loans into one payment of these lower interest consolidation loans you can lower your monthly payments.
For example, if you had credit card, payday loan and medical debt you can combine all of these high interest debts into one larger loan with lower interest and use the funds to pay these smaller debts off, saving you on interest repayments.
If this loan repayment is still too high, you could also extend the repayment period of your debt consolidation loan. This will lower your monthly amount payable but will also increase the total amount of interest that you will pay during the loan term.
Advantages Of Debt Consolidation Loans
A debt consolidation loan has several advantages that include the following -
- Fixed monthly repayment – This will help keep control of your finances and allow you to plan for the future. You will in effect be able to control you debt more, instead of debt controlling you.
- Lower interest rate - Payday loans, credit cards and short term loans like these generally all come with a high rate of interest, by switching to a debt consolidation loan you can cut these interest charges into one smaller interest rate, saving you money.
- Less stress - By combing all of your small debts into one larger, but more manageable debt, can actually reduce your stress levels. Trying to keep track of 5, 10 or more small debts can be stressful – when to pay them, how much, your cash flow etc. With one debt to pay each month it is much easier to be in control of your finances and organize your debt.
Disadvantages of Debt Consolidation Loans
Just with everything in life there are negative points to these loans -
- Longer lasting debt – You may have to increase the repayment term of your loans so that you can afford the monthly repayment. Based on your current loans’ interest rates and terms, this could cause you pay less per month but more in total over the course of the debt consolidation loan.
- Cost more - Following on from above, a longer debt could mean that you pay more in interest charges over the course of your loan.
However, everyone’s personal circumstances are different and these pointy raised above may not be applicable to you. You should seek an debt consolidation expert’s opinion before drawing any conclusions.