What Is A Debt Consolidation Loan

Category: Finance, Credit.

What is a Debt Consolidation Loan? This allows you to have only one payment each month, and typically saves you a lot of money on interest.

A debt consolidation loan is basically a loan taken to pay off other debts. There are many types of debt consolidation loans, but the most popular are personal loans or home refinancing mortgages. Basically, it is a viscous circle: you have debt, you need to consolidate, you can not because your credit is bad, you can not clear up the credit because you have debt, so you need to consolidate, etc. The Problem With Debt Consolidation Loan: Most often, those seeking this type of loans have horrible credit due to the debt they are trying to consolidate. Even if you can find someone to give you a consolidate debt loans, you may wind up paying so much in interest due to your bad credit score that you actually do not save any money by consolidating the debt. Even though interest rates may be high and you may not save any money by getting a consolidation loan, you can still benefit from it.

So Why Get a Debt Consolidation Loan? This is due to the way that credit scoring works. However, unpaid debt on your credit report severely lowers your credit score. Items posted to your credit report as slow pays will remain on the report for up to seven years, even if you pay them. Basically, even if you have slow pays on your credit report, you will have a better score if the item is paid off. Getting a debt consolidation loan to pay all of your current debts will raise your score a bit, and make it easier to clean up your credit faster.

Additionally, items renew the seven year mark each time you make a payment, so by paying the original creditor bit by bit, you are actually prolonging the amount of time that the slow pay will show on your credit report. Before You Get A Debt Consolidation Loan: Before taking on a debt consolidation loan, you need to take a close look at several factors. Secondly, look at the types of debt consolidation loans you can qualify for, and make a list of all of the interest rates. First, make a list of all of your current debt and the interest rates that you currently pay. Finally, total up the amount you will pay to clear the debt with and without the loan. This is especially important if you have bad credit and are looking at very high interest rates. This will help you determine if you will wind up paying more or less for your debt by consolidating.

A Consolidate Debt Loans Will Not Solve Everything: This is an important key to getting out of debt that many people ignore or do not understand. You have to examine how you got into debt in the first place. It is not enough to get a consolidation to clear up your debt. Typically, getting this far into debt is accomplished by spending more money than you make. Develop a budget and stick to it, using credit and credit cards as little as possible. In order to clear up your credit and stay out of debt after getting a consolidate debt loans, you need to take a close look at your expenses and income.

This will help you to avoid having to get another debt consolidation loan within a year or two, as is common.

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