Debt Consolidation Loans and How They Work
Take action to get out of debt
Every day millions of people from all over the world reached the point of no return in regard to personal debt. One of the biggest mistakes people in debt make is doing nothing about it. Many think there is nothing that can be done.
Debt consolidation is a debt management strategy that combines existing debts into a single loan, called a consolidation loan. A lot of debtors get consolidation loans from credit unions or banks. Most consolidation loans have a fixed term, generally 3 to 5 years. While consolidation loans do have advantages, note that new debts you incur after getting one will not be included in your consolidation loan payments.
A big decision
For many, the decision to secure a consolidation loan is more difficult than securing the loan itself. You have to ask yourself why you should consolidate your debts.
There are a number of reasons to consolidate your debts. That said, let’s outline the more significant. Generally, a consolidation loan will lower your total annual percentage rate, or APR. Most consolidation loans also offer fixed APRs. Consolidation loans make it easier for debtors, as it means only one bill to pay.
Do the math
Securing a debt consolidation loan only makes sense if your new APR will be lower than your existing ones. You shouldn’t get a debt consolidation loan with APR greater than the average APR you already pay.
The average of your existing loans is rather easy to determine. For example, let’s say you have five existing debts with APRs of, 12 percent, 15 percent, 14 percent, 16 percent and 18 percent. The total of these equals 75 percent. Divide that figure by the number of percentage rates, in this case 5, and you get 15 percent. This is the average APR on existing loans.
Now you have a baseline to work off of when you shop for consolidaiton loan lenders. A consolidation loan with 13 percent APR would be to your advantage, but one at 16 percent would not be.
Hope for those with bad credit
It’s likely that your credit report is not what it once was. That said, some lenders take it into account that your monthly payment will be reduced, and accomodations for bad credit would also be accounted for.
Determining where you are in your debt situation is imperative to creating a plan to help yourself out of debt. Consolidation loans work for a lot of people. They don’t always work for everyone.
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Tagged with: bad credit • bad credit lenders • consolidation loans • debt consolidation
Filed under: Financial Aid
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