How Debt Consolidation Loans Work
Take action to get out of debt
Every day millions of people from all over the world reached the point of no return in regard to personal debt. One of the biggest mistakes people in debt make is doing nothing about it. Many think there is nothing that 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 have a fixed term, generally 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 must ask yourself why you should consolidate your debts.
There are a number of reasons to consolidate your debts. However, let’s outline the more significant. Generally a consolidation loan will lower your total APR or annual percentage rate. 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 should never take a debt consolidation loan with APR that’s higher than the average APR you’re currently paying.
The average of your existing loans is rather 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 by the number of percentage rates, five, and you get 15 percent. This is your average APR on your existing loans.
Now as you shop for consolidation loans through various lenders, you have a baseline in which to work off of. 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.