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Debt Consolidation Loans

Is your debt piling up? Do you have to make half a dozen payments each month to several different creditors, each one with a different interest rate? Are you looking to simplify your debt? If you answered yes to all of those, a debt consolidation loan may be a good solution for you.

A debt consolidation loan is sort of like a debt replacer. You receive the loan from a debt consolidation company, which pays off your debt while you pay off the loan. You still have the same amount of debt, but the payment - and hopefully the interest rate - is more manageable. Instead of making multiple payments to multiple creditors, you make one payment to the debt consolidation company.

Not everyone qualifies for a debt consolidation loans, and they're really best suited for large amounts of debt. If you owe less than $10,000, you might see better results from a different financial relief solution.

Consolidation Loans Could Help You

Debt consolidation might sound like a great plan, but there are some caveats. Interest rate is key when it comes to getting a consolidation loan. Sure, it's nice to have only one payment a month, but if your loans are consolidated at a high interest rate, you could end up paying much more over time. How do you get a good interest rate? Usually with collateral. If you have collateral (you own a home or car) you can leverage it to get a better interest rate from your debt consolidation loan.

Lenders are more comfortable dispensing loans when you have collateral. Collateral is the difference between secure and unsecure debt. Secure debt involves collateral, there's something tangible backing it up. Should you fall behind or fail to make your payments, the lender can seize your collateral in an effort to recover the lost money. So if your house is on the line, it could be foreclosed if you can't make the payments. It's an incentive for you to keep up with payments.

It's possible to get a debt consolidation loan without collateral, but you need to have a good credit score, reliable employment, and a good credit/payment history. Even with those things, it's still likely that your loan will have a higher interest rate. When lenders have nothing but a promise and a signature to guarantee payment, they're less likely to lend money. That's not to say you can't consolidate your debt, it depends on your special debt circumstances and the kind of debt you have.

For example, student loan debt is great for debt consolidation, however because some are government subsidized or private, they can't be consolidated into your other unsecure debt. In other words, you can't combine credit card debt with student loan debt. Consolidation can also be great for those with large amounts of medical debt. When medical debt piles up it can come from several different hospitals, specialists and clinics. In some cases it might be easier to consolidate that debt with a debt consolidation loan so it's easier to manage.

Debt Counseling Alternatives

If debt consolidation is not right for you, there might be a better solution. The circumstances surrounding your debt are unique, which is why there's no one-size-fits-all debt relief option. If credit and debt counseling services aren't for you, try one of the following:

  • Debt Consolidation - Combine your debt through a debt consolidation loan and pay it off with a possibly lower interest rate.
  • Debt Settlement - Work with a debt settlement company that can negotiate with your creditors and actually lower your debt amounts. Stick with the program they create for you and you could actually get out of debt faster.
  • Bankruptcy - This should really be looked at as a last resort because it can negatively affect your credit score for years, but it's still an option. Make sure you consult with a licensed attorney in your state for further information and guidance on bankruptcy.

To learn more, read our page on the difference between debt consolidation and debt settlement or call to find out which is right for you.