A consolidation loan is when you pay out one loan some smaller loans. In general, the interest rate will be lower, and a good consolidation loan will provide a fixed rate that will not fluctuate with the market. A consolidation loan can be a signature loan with no collateral or it can be linked to something like a car or your home as a second mortgage. There terms of the loan can be adjusted, which can lower your monthly payment by extending the life of the loan.
Benefits of a fixed interest rate
The biggest advantage of a consolidation loan is a fixed rate. This guarantees that your interest rate will not rise despite market conditions, as opposed to most credit cards. Furthermore, you can usually qualify for a lower interest rate than most credit cards. Paying less interest will save you money and mean more of your monthly payment goes to the balance principle rather than to interest.
Finding consolidation loans
There are many different places to find a consolidation loan. The best places to work with are your local banks or credit unions. Start applying there to get the best interest rates and terms for your loan. Companies that advertise on television or in the post often have higher interest rates and fines if you’re late on a payment. They work for people with poor credit history to attract and charge higher rates because of it.
Dangers of consolidation
Although debt consolidation reduces your monthly payments and helps you get a handle on your debt, there are risks involved. If you take a second bond or bind the debt at your home, you are at risk of losing if you miss any payments on your home. For this reason, do not ever pay off credit card debt with equity you cash from your home. Another problem is that many people still use their credit cards after they pay off and find in a similar situation in a few years, only owed them the debt consolidation loan on top of their credit card. If you stop taking a credit card consolidation loan using your credits completely.