What is a Debt Consolidation Loan?

13 Aug 2007 Tell a Friend

Accumulating a number of different credit cards is easier than you would think, when you consider the sheer volume of deals and special offers in the credit card marketplace.  But what happens when you have bitten off more than you can chew, and you have incurred credit card debts which amount to more than what you are earning each month? Obtaining a debt consolidation loan may just be the answer to your financial woes if you find yourself in such a situation, although this requires careful financial planning and significant organisation to make it worthwhile.

What is a debt consolidation loan?

A debt consolidation loan is taken out from a lender (either a bank or a speciality lending institute) to repay all of your high interest debts at one time. By doing this, you are eliminating a large amount of interest costs that would have incurred over the months or years it would have taken you to fully repay your debts. In addition to lowering your interest payments, a debt consolidation loan will lengthen the amount of time you have to repay your debts. With credit cards, you are often given only a short time to repay the money you owe before enormous charges start racking up, but with a debt consolidation loan, you will be able to decide the term of your loan. Finally, with a debt consolidation loan you will only need to worry about making one payment each month instead of a multiple payments to multiple creditors. This will decrease the stress and the inconvenience of having to make more than one payment.

What are the advantages of a debt consolidation loan?

  • You do not need to worry about paying for three or four different credit card payments each month. With a debt consolidation loan, there will only be one monthly payment that you need to worry about.
  • A debt consolidation loan will give you more control over your finances. As long as you come up with the amount that you owe for the entire debt consolidation loan, then you can rest assured that all your other debts are being taken care of.
  • There is little to no effect on your credit rating since all your payments are being made on time. 

Just as with any other financial options available for those struggling with significant debt, there are downsides to obtaining a debt consolidation loan.