When you get a consolidation loan, you are not increasing your debt; in fact, you may even be reducing it. You are borrowing a lump sum of money in order to pay off your high interest rate debts, replacing those payments with payments for the new loan. This may reduce debt because a consolidation loan will give you a lower interest rate than many other kinds of debt, particularly credit cards, and their rates can be as high as 20-25%.
A consolidation loan may be obtained from your mortgage company, another company that you already have a loan with, or any other lender. There are even some lenders who help their customers lower debt and interest by negotiating with their creditors.
You may want to check out several of these options to find out which will save you the most money. But before you do this, set a budget. Have a good idea how much you can afford to pay on your debts every month, and the lenders will be able to give you a more accurate idea of how much your consolidation loan will cost you.
If you go through your mortgage company, you can consolidate your debt using a home equity consolidation loan. Borrowing against your home’s equity will probably get you a lower interest rate on your consolidation loan than you will find anywhere else, and since many credit cards have interest rates above 20%, you may save a lot. With home equity loans, though, you may have to pay closing costs, points, annual service charges, and/or other fees. If you are getting a home equity consolidation loan, be sure to know all charges that may apply.
Other consolidation loans work much like a home equity consolidation loan. They give you the sum of money at a much lower rate than is offered by credit cards, you pay off your debt and replace those payments with your monthly payment towards the consolidation loan. Occasionally, these consolidation loans will require another kind of collateral since you are not a homeowner.
Another option is the non-profit credit counseling organizations. What they give you will not actually be a consolidation loan, but it will work much the same way. You usually pay them a fee in advance and a small amount monthly to cover their expenses, and they will contact your creditors and negotiate better interest rates and payment plans for you. They will even actually pay your creditors. Then you pay them a monthly sum to cover the amount they are paying on your bills. Their fees are very minimal compared to those you will face on a home equity consolidation loan, or any other kind of consolidation loan.
A common misconception about consolidation loans is that they will damage your credit. A consolidation loan should actually help your credit. Creditors view them as an attempt to get debt in order, which is a positive step financially. Another way you can use them to improve your credit is to schedule a realistic payment plan for the consolidation loan, and make those payments on time.
A consolidation loan may be a great first step towards becoming debt free and improving credit. Make your payments on time and don’t incur more debt, and your financial situation will improve quickly with the help of your consolidation loan.
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