What is a Debt Consolidation Loan?

In today’s credit economy, lots of people have an unmanageable number of debts to pay back, sometimes dozens of them.  These debts can be for all kinds of things—cars, medical bills, personal loans and more.

Not only is each of them stressful by itself, but keeping track of them all is stressful too, and getting hounded by dozens of companies every day can become incredibly annoying (if not downright frightening).  Keeping up with so many debts is difficult, and paying each of them on time every month can be expensive and time consuming.

One solution to this problem could be to get a debt consolidation loan.  A debt consolidation loan won’t dissolve your debt, but it will, as the name implies, consolidate your debt into something more manageable.

When you take out a debt consolidation loan, the new lender will pay off your old lenders.  At that point, all those threatening phone calls should cease immediately, and you will no longer be responsible for paying each of those bills every month. 

You will however still owe all that money, but instead you will owe it to the debt consolidation lender.  The bills will be consolidated into one bulk amount, and that’s the bill you will pay each month.

How much you will be responsible to pay each month is something you will need to discuss with the lender in advance.  Do keep in mind though that since this is now a lump sum, it will be a larger bill than any of your previous smaller bills, but probably comparable to the combined total you were used to paying.

One of the reasons that people consider getting a debt consolidation loan is in the hopes that they can trade in their higher interest rates for a lower interest rate.

Before you do decide to consolidate for this reason, you will want to add up all the interest rates you do have, get a quote on an interest rate from a debt consolidation lender, and make an objective comparison.  You may or may not actually save money with a debt consolidation loan; it depends largely on your credit rating.

If your rating is too low, then you may be given a higher interest rate, especially if the debt consolidation lender doesn’t require collateral. 

Debt consolidation looks great on the surface, but it’s a complex issue.  For some people it may be beneficial while for others it may only increase debt.  Then again, a small increase in debt may be worth it for more peace of mind.

There’s a price you might pay for not being harassed by twenty creditors every month, and you always pay a price for having an unsecured loan.  Not having to worry about your house or vehicle being seized as collateral can be a big deal.  Whether or not debt consolidation is worth it to you is something which you will have to decide for yourself after weighing the pros and cons of all the options as they apply to your particular situation.