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How Do Debt Consolidation Loans Work?

Like every financial choice, deciding on a debt consolidation loan requires that you understand your options.

Debt consolidation loans are one powerful way to free yourself from the limitations of debt. How do debt consolidation loans work? Like every financial choice, understanding the factors at play is the best way to create a positive outcome.

What Are Debt Consolidation Loans?

Banks, credit card companies, and mortgage lenders offer debt consolidation loans that replace your accrued debt with one single loan. Financial professionals designed debt consolidation loans for individuals who cannot make their monthly payments and feel overwhelmed by a plethora of bills. The biggest advantage of this kind of consolidation is that it decreases your monthly payments, making it easier to balance your debt and other financial responsibilities. You only have to pay one bill, rather than monthly bills to different creditors. You can also often receive a lower fixed interest rates than the ones you currently hold with your creditors, making it beneficial for you in the short term.

What Kinds of Loans Can You Consolidate?

Credit card debt and student loans are the most popular loans to consolidate. Personal loans can be condensed into one loan or credit card, making it easy to keep track of your debt. If you own a home or property, you can consider using it as collateral on your debt consolidation loan to secure the lowest possible interest rate.

What are the Disadvantages of Debt Consolidation Loans?

When you choose a debt consolidation loan, you do not eradicate your debt, but you transfer it to a new institution. Debt consolidation loans, while offering lower interest rates and lower monthly payments, often have a longer repayment period — you most likely will pay more over the long run than if you didn’t refinance your debt. Experts also suggest that you do not take on any more personal debt while paying off your refinanced loan. If you choose a debt consolidation loan that uses your property as equity, be especially thoughtful about your choice. Failing to make your payments could result in your losing your home.

Weighing Your Options

Instead of committing to one plan or financial institution on the spot, reach out to a list of different companies and organizations. As always, request information about any charges associated with the loan. (Some financial institutions include hidden fees.) We also recommend using CESI’s Debt Consolidation Calculator to calculate the impact of each debt consolidation loan on both your monthly payments and long-term financial picture.

When thinking over the question, “how do debt consolidation loans work,” consider calling a certified counselor if you need more help. Together, you can talk through your loan options, empowering you to make the best decision for yourself and your loved ones.

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