Debt Consolidation Loan: Facts You Should Know

A debt consolidation loan is used to pay off other loans, usually with the purpose of securing a fixed interest rate, lower interest rate or just for the ease of managing only a single loan. Debt consolidation generally involves putting a secured loan next to an asset which acts as a collateral. With the collateral, you would most likely get a lower interest rate because the lender would have a reduced risk. The collateral would make sure that there is a way for you to pay back the debt consolidation loan, whether by foreclosure or not.

In theory, getting a debt consolidation loan is more advisable for those paying off a credit card debt. A credit card, in fact, can have a larger interest rate compared to a bank's unsecured loan. But if you have a property, such as a car or a home, you could obtain a lower rate through the secured loan if you use your property as a collateral. In effect, the total amount of interest and also the entire cash flow that is paid towards the debt would be lower, and this would allow you to be able to pay for the debt sooner and with less interest.

A debt consolidation loan may actually be the perfect solution to your debt problem. The major advantage of this is its convenience. For instance, instead of trying to pay 10 different creditors that are charging you with varying rates and at different times during the month, you just have to take out a single loan to pay off those accounts. And then you pay for that debt consolidation loan once a month.

But before you sign on your debt consolidation agreement, you have to consider some things first. Check out the following tips:

• Make sure that the costs of your new debt consolidation loan will be much less than what you are paying your creditors. It is possible that you may not get the lowest interest rate available, especially if you do not have a collateral to secure the debt consolidation loan.
• Calculate all the fees and interest on your existing accounts so you can find out the total amount of payments that you currently make. Compare the amounts with your debt consolidation loan numbers and determine if it is really a better option.
• Shop around first. Before agreeing to any debt consolidation loan, make sure that you have checked this is your best option. Check out the nearby banks and see if they have what you need. Consider though if you have a poor credit history getting the loan you need from the high street banks may prove more difficult.

If you want to find out more about debt consolidation loans, refer to our other articles, including 3 Important Debt Consolidation Considerations.