Credit Consolidation Loan

Credit Consolidation Loan

It's been said that when you have a lot of outstanding debts, you should try to pay off the ones with the highest interest rates first, then focus on the others, meaning pay more than the minimum required amount on the highest interest rates while continuing to just pay the minimum on the rest. However, that can be a lot of interest rates and bills to keep track of. One way to keep everything straight is to get a credit consolidation loan.

How a Credit Consolidation Loan Works

A credit consolidation loan is a loan given to you to pay off your creditors. Imagine it--you have six credit cards with outstanding balances, one medical bill that's a tad too high and has been nagging at you and the remainder of your student loan. Then you get a credit consolidation loan and pay them all off! All of those monthly payments are replaced by one monthly payment to the credit consolidation loan company. No more keeping track of which bill has the highest interest rate, which ones to try to pay off first, etc. If you continued to try to pay your bills the other way, it could take you 18-30 years to get everything paid off because of high interest rates and finance charges. But now those are all gone. Your credit consolidation loan interest rate is so much lower than what you were paying before that you'll be out of years in about five years.

When you get a credit consolidation loan, your lender might suggest that you get some credit counseling. This is good advice for anyone who's ever had to get outside help with their debt. Credit counseling can teach you how to budget, how to save and how to use credit wisely so that you can avoid debt problems in the future.

Downfalls of Credit Consolidation Loans

When you pay off your unsecured debts with a credit consolidation loan, you have to be careful. While you're not as likely to incur more student loan debt or medical bills (at least we hope not), it may be tempting to go right back to your credit card usage. It won't happen right away, but it can happen. Then you'll have credit card payments again on top of your loan payments. Eventually, you will have a problem that's worse than what your original problem was.

Another downfall is that to get a debt consolidation loan, you need collateral like a house, a boat or a car. If you miss payments on your loan, you lose your collateral, and your credit goes south too. If you don't have collateral, you can still get help with your debt in the form of credit consolidation. Just be sure to be disciplined when you get a debt consolidation loan so that you don't end up needing bad credit consolidation someday.

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