subject: Is Debt Consolidation A Smart Choice? [print this page] Perhaps you are considering a debt consolidation loan. Debt consolidation involves taking out one loan to pay off one or more other loans. The right way to do this is to use the money from the consolidation loan to pay off several other high-interest debts.Debt consolidation loans work this way: you borrow a sum of money from a financial institution (a bank or credit union, for example), and you use that loan to pay off all your outstanding loans. The consolidation loan has a lower interest rate than the high-interest loans that you're paying off. That should make your payments smaller. On top of that, the length of the loan is usually longer than the repayment schedule for your original debts, thus lowering your monthly payment.
A debt consolidation loan works like this: borrow a sum of money from a bank or credit union, and use the money from the loan to pay off your other obligations. Ask the bank to make sure that the consolidation loan has a lower interest rate than the high-interest loans that you're paying off. That allows you to reduce your monthly payment. On top of that, the length of the loan is usually longer than for your original debts, thus lowering your monthly payment again.This can be a smart choice if you are careful to budget your money properly after you consolidate your debts. You should never use the additional freedom you gain from the consolidation to incur more debt.
But if you are careful with your financial planning, and get some good advice (such as from a reputable credit counselor or other financial advisor), you can use a consolidation loan to help preserve a good credit history.
Some debtors are tempted by offers of low-interest credit cards, thinking they can save money on interest that way. Trouble is that these low interest-rate offers only last a short period of time, and then they go to higher rates, and the savings is lost. This is probably one of the worst ways to handle your debt troubles. Make sure to avoid additional debt, especially credit card debt.
A possible advantage to debt consolidation loans is that the borrower now has only one loan payment to manage. This should make budgeting much easier and reduce tension. One of the difficulties of high debt is managing all the payments that have to be made throughout the month.
