When you have several different debts draining away your money, energy and peace of mind, a debt consolidation loan might seem like just the thing you need to solve your problems. Although at first, it may seem quite illogical to take out yet another loan when you already have several to worry about. Some people can actually benefit from it as it can be the loan to end all your loans. With a debt consolidation loan, you can use it to pay all your existing loans so that you will have only one payment to take care of each month until you become debt-free.
How does debt consolidation work?
A debt consolidation loan is a single fixed term loan meant to replace several high-interest loans. So how does the loan work? Let’s say that you owe $2,500 on one credit card, $3,200 on another credit card, $1,500 on a department store card and $8,500 on a car loan. The total amount you owe is $15,700. Needless to say, all of these different loans will have different interest rates and fees as well. There will also be several monthly bills and statements to keep track of, which can be time consuming and stressful. With so many bills bombarding you every month, you will have a very tough time managing your debts.
By consolidating all these loans into one single loan, you will be left with only one loan repayment amount, only one interest rate and only one set of fees. As anyone can tell you, one loan is easier to manage than several different loans. More importantly, you can usually get a debt consolidation loan at a lower interest rate than credit cards and other high interest loans. If there are any other fees to pay, such as late payment fees, then there will be only one fee, which can be lower than that of several different fees combined.
When should you consider debt consolidation?
Consolidating several large loans is often not a good idea as it doesn’t serve the purpose, which is mainly to lower the interest rate and fees. You may, in fact, end up with additional fees and a higher interest rate. However, if you have several small loans with high interest rates and fees, such as credit cards, then it can sometimes be the best solution for you. By consolidating these loans, you can significantly lower your interest rate and fees.
How to know if debt consolidation is right for you?
If you are unsure about taking out a debt consolidation loan, then you should add up all the different loans you have and their combined interest charges and fees. While doing that, you should also take into account the time and energy it takes to manage all those loans. Next, you should research lenders and find out their interest rates and fees. Using a financial calculator, such as our Line of Credit and Loan Repayment Calculator makes it easier to see the picture clearly and arrive at a decision.
A debt consolidation loan may not always be the right option for solving your debts. Talk to one of our counsellors to find a solution that works for you. Call us today at 1-888-753-2227.