If you are in a lot of credit card debt, or have debt from other sources like payday loans and personal loans, you may be considering a debt consolidation loan. When used properly, debt consolidation loans are a good way to eliminate your debt, and rebuild your credit score. But they’re not right for everyone. Let’s explore the basics about these loans now.
Understanding Debt Consolidation Loans
A debt consolidation loan is exactly what it sounds like. You take out a loan from a bank or another financial institution, and use this money to repay your other debts.
This may sound a bit silly – after all, you’re just moving debt around, right?
Well, debt consolidation does have some advantages. First, interest rates for personal debt consolidation loans are usually much lower than interest rates for credit cards, so you can save quite a bit of money if you use a debt consolidation to pay off your debt.
A debt consolidation loan also consolidates your monthly payments into a single payment. This saves you money, and simplifies your financial situation.
However, debt consolidation loans are not right for everyone. They are only a good choice if you are dedicated to using credit responsibly – and avoiding the trap of falling back into debt.
Signs Debt Consolidation Loans Could Be Right For You
Wondering if debt consolidation is right for you? Here are some signs you could benefit from using a debt consolidation loan.
- You’re Ready To Take Control Of Your Finances – Debt consolidation is not a good idea for anyone who is still having trouble budgeting, paying down debts, or overspending. Once you’ve decided to take control of your finances, you’re ready for a debt consolidation loan.
- You’re Having Trouble Making More Than Minimum Payments On Your Debt – If you have multiple credit cards with high APRs, and you’re starting to struggle to make minimum payments, a debt consolidation loan can help you pay down the principal on your debts more quickly, and avoid further credit card debt.
- You’ve Stopped Overspending On Credit Cards – The worst thing you can do after taking out a debt consolidation loan is to open new credit card accounts, and start overspending. Taking out a debt consolidation loan does not mean your debt is repaid.
It just means that you are going to be paying less over the long-term to pay down your debt. You’ll still likely be making payments for 6+ years – so avoid the trap of thinking that your debt has been dealt with, and you can continue to spend irresponsibly. Don’t open new credit cards after getting a debt consolidation loan – or else you risk putting yourself even further in debt.
- You’re Committed To Paying Down Your Debt For The Long Term – Most personal loans and debt consolidation loans will take 5-6 years to repay. If you manage to repay the entire amount, you’ll likely save thousands of dollars – but this is only true if you actually commit to repaying the debt.
If you fail to repay your debt, or you default on your payments, you could put yourself in an even worse financial situation. So you should only consider a debt consolidation loan if you are truly committed to rebuilding and repairing your credit, and putting yourself on track for a better financial future.
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