A debt consolidation loan is a loan that gives you the cash to pay
off your loans. It is a bit like borrowing money to pay off money, but it works
for several reasons. The best way to understand a debt consolidation loan is
by looking at an example. Let's say that you have three credit cards, each carrying
balances of over $1000. Let's also say you have a $10 000 car loan, a $100 000
mortgage, and a personal loan of $5 000 from the bank you took out for home
repairs. Let's further say you have $5 000 in health debts owed. Now, you get
seven bills a month, each asking for a specific amount of money to pay off each
loan. You pay different rates on each loan, so each accrues interest at different
rates. In total, your debt payments add up to several hundred dollars (if not
over a thousand dollars) each month. This may make it very difficult for you
to pay your bills each month. A debt consolidation loan may help you by reducing
your overall interest rate, your monthly payments, and your bill-paying hassle.
A debt consolidation loan will help you by essentially refinancing your debts
to make them more manageable.
In the above example, you have several choices for a debt consolidation loan.
You may go to your bank for a new loan. You may go to a debt consolidation company
for a loan. You may also go to a company offering home equity loans for a debt
consolidation loan which uses your home's worth as collateral. In each case,
you will receive one lump sum of money to repay you debts. In the case of a
debt consolidation company, the company itself may repay your debts. Then, you
will have to repay the new debt. While none of your debts will be forgiven or
erased, having one debt will help you. You will have one low interest rate.
You will have only one bill to pay each month, so you will be less likely to
overlook a bill in a stack of seven bills. You will have lower payments each
month - likely only a few hundred dollars in the example above. You will also
likely have more time to repay your debts; most debt consolidation loans give
you at least a few years to repay your debts.
