Debt Consolidation- What Is It?

October 6th, 2010 | Posted in Credit Card Debt

How does debt consolidation work?Debt consolidation amounts to nothing more than taking out one loan to pay off one or more higher interest and more burdensome loans.Start by doing this: get a loan from bank or credit union, and you use that loan to pay off all your outstanding loans. You should be sure of two things: make sure that the amount you borrow will be enough to pay off your other debts, and be sure that the interest rate is lower than your other debts you’re paying off.

That should result in significant savings.Done the right way, a debt consolidation loan can help in getting your debts under control.

Getting a debt consolidation loan is not free. And sometimes the person who needs the debt consolidation loan is in the worst position to get the loan he/she needs. The person applying for the loan may have a poor credit rating score already. And getting a new loan can be very difficult and expensive.

A way to make use of a consolidation loan is to use the reduction in monthly payments to pay off your debt more quickly. If you make sure you borrow at a lower rate of interest and repay the loan over a longer period of time, you could find that you have extra money every month. You must change your thinking at this point. Be extra sure to use that surplus money to make larger payments on your consolidation loan. That way you save even more money by reducing the amount of interest you pay. When you apply for the loan, make sure you are allowed to make extra payments on the principal.

Debt consolidation loans have several benefits: first, the debt consolidation loan has a reduced interest rate compared to the other loans. Often a debt consolidation loan can be obtained for 10 or 11 percent interest, while credit cards often bear interest rates as high as 20 percent or higher.One way to get a really good rate on a debt consolidation loan is to get a home equity loan. And with a home equity loan you get another advantage – the interest payments on the loan can be a deduction on your income tax return.

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