A consolidation loan is a single loan used to pay off multiple loans. Using debt consolidation is advantageous for many reasons. First, using a consolidation loan makes it easier to pay off debt, because it is just one loan instead of several smaller loans. This makes it easier to focus on your debt, intuitively, because everything is located in one place. Another advantage of debt consolidation is that it can lower your overall interest rate. Your interest rate with several loans may be slightly higher than your interest rate with one consolidated loan. In some circumstances, debt consolidation can even secure a fixed interest rate, an advantage rarely offered with smaller individual loans.
You can consolidate debt for several different types of loans and debt sources such as student loans, credit card debt, or medical debt. The methods for debt consolidation however vary for each type of debt. Usually debt consolidation is a good idea to eliminate credit card debt simply because credit card debt has notoriously high interest rates. A typical way to consolidate credit card debt is available only to home owners. For home owners, your home can be used as collateral to borrow against your debt. However, there is a danger in using secure debt like your mortgage (tied to an asset) to cover unsecured debt, like credit card debt (not tied to an asset). If you fail to make payments you could loose your house. Although the payments will be lower, they may have a longer repayment period. Therefore, beware of using secured debt to cover unsecured debt. Another drawback is that the monetary costs of consolidation, such as consolidation fees, may be too great to cover and may outweigh the advantages of this option. So make sure you explore other options, like speaking to your creditors to lower your payments, because as mentioned above there are several concerns with debt consolidation.
Student loan consolidation works a bit differently. Federal Loans can be consolidated by federal Direct Student Loan Program. This program was created in the 1980’s to help students pay for loans under an interest rate determined by the Government. Unfortunately, the recent hazardous condition of the credit market has left this option less accessible. Many lenders (private lender in particular) have suspended their debt consolidation programs until further notice.
All in all, a consolidation loan may not be the answer to your problems. It may just be a not so quick fix. There are both risks and benefits to this strategy, but it necessary to weigh your costs and benefits to determine if debt consolidation is the right choice for you. To get to the root of your debt problem consult with credit counseling organizations (with low fees) and try debt management plans before turning to consolidation.
Sources:
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
http://loanconsolidation.ed.gov/help/glossary.html#consolidation
http://www.cfnc.org/paying/loan/info_consolidation.jsp
Apart from contributing public service and active involvement on campus, Sybria is very passionate about creative writing and writing in general and hopes to bring a sociological point of view to her articles. Her interests outside of writing and public service include reading books concerning fashion and spending time with her family.
A well rounded curriculum involving Business and English academics in addition to sociology, have helped shaped this young writers’ unique voice. She is eager to share her newly acquired skills and looks forward to helping others approach every day problems from a new, and perhaps, sociological outlook.
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