What Are Debt Consolidation Loans?

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Every day millions of people from all over the world reached the point of no return in regard to personal debt. One of the worst mistakes people make about debt is doing nothing about it. A lot of people think nothing can be done.

Debt consolidation is a well known management strategy that combines existing debts into a new single loan called a consolidation loan. Many debtors secure consolidation loans from banks or credit unions. Most consolidation loans come with a fixed term, usually 3 to 5 years. While consolidation loans have significant advantages, you should note that new debts that you incur after securing your consolidation loan will not be paid off by your consolidation loan.

A big decision

For many, the decision to secure a consolidation loan is more difficult than securing the loan itself. You have to ask yourself why you should consolidate your debts.

There are a number of reasons to consolidate your debts. That said, let’s outline the more significant. Generally, a consolidation loan will lower your total annual percentage rate, or APR. Most consolidation loans also offer fixed APRs. Consolidation loans offer discipline for many debtors because they only have to pay one bill.

Do the math

Securing a debt consolidation loan only makes sense if your new APR will be lower than your existing ones. You shouldn’t get a debt consolidation loan with APR greater than the average APR you already pay.

The average of your existing loans is easy to determine. For example, let’s say you have five existing debts with APRs of, 12 percent, 15 percent, 14 percent, 16 percent and 18 percent. The total of these equals 75 percent. Divide that figure by the number of percentage rates, in this case 5, and you get 15 percent. This is the average APR on existing loans.

Now you have a baseline to work off of when you shop for consolidaiton loan lenders. A consolidation loan with a 13 percent APR would serve to your advantage, while one at 16 percent would not.

Hope for those with bad credit

It’s likely that your credit report is not what it once was. However, lenders take into account that your total monthly payment will be reduced significantly, and accommodations for bad credit would be taken into account.

Determining where you are in your debt situation is imperative to creating a plan to help yourself out of debt. Consolidation loans work for many people. They do not work for everyone.

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