Is a Debt Consolidation Loan Right For You?

Allison Beatty
LoanBiz Columnist

Article Rating , 5 out of 5 based on 1 votes

If your debt load is becoming unmanageable, you may be considering a debt consolidation loan. This type of loans pays off all your debt and rolls all the outstanding debts into one new loan. Is this the right step for you?

Examine Loan Goals

A debt consolidation loan can work well if your goal in debt consolidation is to streamline your monthly bill paying and reduce your interest charges. These loans often carry a lower interest rate than many credit card accounts, particularly if they are a second mortgage.

Examine Loan Collateral

The interest rate you pay on a debt consolidation loan will vary based on the collateral used to secure it. The best interest rates typically come with using your home as collateral. A home equity loan, which is a second mortgage on your home, can be a good way to pay down debt and receive a favorable interest rate.

If a second mortgage is not an option, then an unsecured loan often is the only route. Shop around for a good interest rate and make sure it is lower than what you are paying on your other debt.

Shop Wisely For Debt Consolidation Loan

Not all debt consolidation loans are alike, so you'll want to take a careful look at the fine print. Consider the interest rate and other fees before committing. Also look at the payback period and consider whether you can realistically make the monthly payments.

Avoid Adding to Your Debt Load

If you take out a debt consolidation loan, remember that the goal is to get out of debt. Don't make the mistake of adding to your credit card debt after the new loan is in place. Establish a monthly budget and use cash for purchases whenever possible.

About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.

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