Debt consolidation is a popular and widely used in debt management strategy in which you get a new single loan call a consolidation loan to pay off your existing debt. Most borrowers obtain consolidation loans banks or credit unions. Once the loan was processed and you receive funds you can pay off all your existing debts in full. Most consolidation loans at a fixed term, usually 3 to 5 years.
Debtors use consolidation loans typically for a few reasons, you get a lower APR, to get it fixed APR, to take just one bill, or do they just one rate.
Many consolidation loans have APR’s that are much higher than those of your existing debts. Debt consolidation only makes sense if you can get a consolidation loan with a fixed rate that is below your current average APR. You should never take a consolidation loan with an API that’s higher than the average APR you’re currently paying.
Don’t make the mistake of assuming that a difference of just a few percentage point in their APR won’t add up to much money over the length and term of the loan. The lure is once a monthly payment is established it often looks so good to the debtor that they go ahead and take deal.
If you begin with a $5000 credit card balance by switching from an 18% APR which is about average for credit card APR, to a 10% APR you can pay off much faster and save about three times as much in interest over the course of the loan.
Many people have debts with variable interest rates. A debt consolidation loan with a fixed APR that will not change keeps your monthly payment the same. While a fixed APR won’t necessarily save you money it will help you to predict and track how much interest you pay each month.
Once your consolidation loan is processed, you will make one monthly payment to cover all your debts. That also means you will pay one rate. The downside and the attraction for many people is once they receive their consolidation loan they begin to accumulate new debt in the form of credit cards, personal loans and other types of loans.
Before you know it you are back to where you began and you will be looking for a new consolidation loan. That is indeed the vicious cycle of being in debt and not sticking to your plan to get out of debt. Bad debt consolidation loans and consolidation loans can work to get you out of this cycle. However, it will take time and energy to change your spending patterns, you’re saving patterns, and the way you think about money in general and mange your debt
