The Benefits of Consolidation Loans

May 16, 2012 by  Filed under: Debt 

Debt is a prevalent issue with many Americans. If you’re sick of struggling with payments, have taken loans from multiple sources, or have even suffered wage garnishment and relentless collection calls, you’ve probably been considering different ways out. One popular option is known as consolidation loans.

Fair warning: by signing up for a debt consolidation loan, you’re essentially signing up for a brand new loan. However, your new lender will buy the existing amount on all of your other debts and then present them to you under one loan instead of many. In many cases this can help to lighten the burden of debt for many people.

There are a myriad of factors that make debt consolidation a nice option. For one, with loans that are owed to multiple sources, keeping track of due dates can be difficult. These due dates can fall in rough spots between paychecks, and you can even miss one bill because you’re concerned with paying another.

Debt consolidation isn’t a cure-all for these problems, though. In most cases, your lender will do their best to get a hold of the loans at a lower price. However, they’ll turn your new loan around to you at a higher interest rate. This is a general factor if you have any outstanding payments, poor credit history, or a habit of late payments. You’re paying for the convenience of one bill, which in some cases isn’t worth it.

Having a consolidation loan can also negatively affect your credit score. When examining your credit, there are a lot of factors that credit bureaus will take into account, and one of those is consolidation loans. Bureaus will notice if you haven’t closed some of your accounts (which happened when your lender bought the loans), meaning you’ve consolidated. This just looks bad on you, because it appears you doubled your debt instead of consolidating. Once you’ve damaged your credit score, it’s a tough road to get back into good standing.

There are instances in which consolidation loans are a good option. These instances include foreclosure and bankruptcy. Examine all your options though. As mentioned above, don’t just pay for convenience. If there’s a way for you to handle your loans on your own, it’s typically better to do so. If it’s gotten too far out of hand, then it’s time to consider a consolidation loan.

If you do choose the debt consolidation loan route, make sure to treat it as the clean slate that it is. Don’t fall back into a pattern of poor payment habits. Do your best to pay on time, and pay as much as you can. This reflects well on your credit score.

In summary, if there’s another way for you to handle your debt outside of a consolidation loan, it’s best to try to manage it on your own. Consolidation loans may sound like an easy way out, but should be reserved as a last-ditch resort.

I’m a wealth management professional specializing in debt consolidations. You may also be interested in reading more information about consolidation loans.

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