Do Debt Consolidation Loans Work?

debt consolidationConsolidation loans, or consolidation of debt may work for you in your goals to get out of debt. Consolidation has some benefits, but it also have some risks as well. Find out if consolidation loans would work for you.

To consolidate your debt, you would take out a new loan that covers the cost of all of your pressing debt. The new loan pays off all of the others, leaving you with one loan. This consolidation loan must still be paid off, of course.

Consolidation loans can make it a little easier to keep up with your debt, since it simplifies the payment process. With one loan, there are no missing bills to find and much less paperwork with which to deal. If you tend to be disorganized with paying your debt, this type of loan might help.

The classic way of consolidating your debt is with a personal loan or a home equity loan. In a home equity loan, you use the equity in your home (its value above the remaining mortgage) as collateral against the loan. A personal loan may have other forms of collateral to insure it.

Not everyone who applies for a consolidation loan will qualify, and lenders have tightened up their approval standards in the last few years. In general, the interest rates on personal loans and home equity loans are lower than credit card rates, so if the bulk of your debt is from credit cards, you may come out ahead. Loan rates vary according to debt, income and credit rating, so do your own good research before applying.

Another way to consolidate your debt is to transfer all of your credit card debt to one single card and then close out the other accounts. This will only work for you if you can get a low- or zero-interest rate on the new card, and if the credit limit on that card will absorb all of the debt. Read your agreement carefully, as some zero- or low-interest rates will skyrocket after a few months.

In general, a consolidation loan will work well for you if you can significantly lower the interest rate on your debt, and you can pay off the loan within three years. Combining the consolidation loan with a debt repayment plan will increase your chance of success with getting out of debt.

It is important to realize that a consolidation loan can be a tool you can use to get out of debt, but it won’t solve the problem. The new loan still needs to be paid, and you will want to make sure that you aren’t tempted to ring up more debt, let’s say on the newly empty credit cards or other credit sources.

Consolidation loans can work for you, as long as you approach these loans with research, an overall plan, and a commitment to get out of debt.