Debt Consolidation Loans: What Are They?

Many banks and financial institutions offer loans which help you to pay all your other debts. Such loans are called debt consolidation loans. Usually such debt would be at a lower interest rate if a collateral is presented, such as a house or a car. These reduce the risk to the lender as there exists an agreement between the borrower and the lender that in case the borrower will not be able to pay the amortization in a certain number of months, the lender will have the right to foreclose the property.

This can be quite convenient to someone who has to pay five or so different loans and credit card bills. Instead of having to keep track of every bill, you can pay off everything and just focus on one particular loan. This can be quite helpful if you do your math. Be careful because convenience does not equate to savings and you might end up paying a higher interest rate than before.

Despite the convenience it brings and the lower interest rate it may apply, debt consolidation still has its risks. Remember that debt consolidation is all your other debt rolled into one, plus interest. So you may end up paying one huge lump sum at a given time. Be sure to that you have the capability of paying this amount. If not paid on time, this may snowball and you would have to pay more than double the next month.

As with any other loan, you have to check if it contains any hidden charges. Learn how to compute for your monthly amortization and do not be afraid to constantly ask the loan officer for questions on how to compute it. It is your right even if it is technically their money you are borrowing. Be vigilant in questioning for any tell-tale fees they may be charging as extra.

Like many products and services out in the market, it is also a good idea to check out the competition. Search for another bank which offers lower interest rates. A good thing to look out for is a break in between payments. Some banks offer a payment break after a specific number of months to give ample time for the borrower to earn more funds for other payments. Other banks delay the start of payment to around 2 to 3 months after the amount was loaned.

Depending on how you use it, debt consolidation loans can be your best friend or your most dangerous foe. Always remember that money is just a tool you need to control and not the other way around. Learn to manage your debts wisely so you can be debt-free in no time.

Source by Jose Fuentes

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