What are Debt Consolidation Loans?

A debt consolidation loan is a financing facility that allows people to combine their multiple debts into a single loan with one monthly payment and usually lower interest rates. A debt consolidation loan is especially beneficial for a borrower who has several credit card debts and high-interest loans. Consolidating your loans into a single loan account means you will be dealing with a single creditor or debt consolidation company instead of multiple lenders.

If you’re struggling on a monthly basis to make at least the minimum payments on your credit card debts and have practically maxed out each card’s spending balance, a debt consolidation loan may just be the right solution to help you crawl out of the trap.

A debt consolidation loan offers the following benefits

• lower interest rate
• convenient single payment to one credit
• monthly payment which has a significant impact on the principal
• eliminates annoying collection calls from multiple lenders
• helps improve credit scores over time

Types of Consolidation Loans

Consolidation loans may be secured or unsecured and each type has advantages and disadvantages.

Secured Debt Consolidation Loans

Secured consolidation loans are backed by major assets such as a house, vehicle, and other properties. Secured loans are typically easier to obtain, have lower interest rates, and generally have higher loan allocation amounts from banks and financing companies. However, your home and other important properties are on the line and you can easily lose them if you miss your monthly payments or if you fail to pay your debt consolidation loan in full. Any savings in interest and reduced monthly payments are definitely not worth the risk.

Unsecured Debt Consolidation Loans

Unsecured consolidation loans are character loans that are based mainly on your credit history. This means that there will be no asset risk on your part. The repayment period is also likely to be shorter which can mean savings in interest over time. The downsides: unsecured loans are more difficult to obtain, have higher interest rates than secured loans, and have lower loan allocation amounts.

The Effect of a Debt Consolidation Loan on Credit Scores

When used as part of a sensible and long-range financial plan, debt consolidation can help improve your credit scores in the long run. Every timely payment made against the new loan has a positive impact on your credit scores. In time, your diligent performance will eventually overturn the negative scores that you may have accumulated as a result of previous delinquencies on several credit card debts. With a single loan to worry about, planning your cash flow should be a lot easier than having to contend with several loans with different deadlines.

Before Signing a Debt Consolidation Loan Agreement

1. Do your homework and search diligently for the bank, financial institutions, or credit unions with the most competitive interest rates. Lower interest rates mean huge savings in financial charges and lower monthly payments
   
2. Be realistic about your financial situation and determine the monthly payment amount that you can actually afford without losing sight of your goal of clearing your debts at the fastest time possible
   
3. Prioritize the settlement of the new consolidation loan and avoid running up more consumer debts on your existing card.
   
4. Discipline yourself to stick to a solid financial plan that will leave you debt-free after a few years of regular monthly payments.

As a debt relief option, a debt consolidation loan offers a range of benefits to a financially-strapped borrower who wants to find release from the harsh shackles of debt.