Debt consolidation refers to the process of taking out one loan to consolidate the balances owed on other accounts into a single source of debt. Proponents of debt consolidation note that a single loan is easier to manage and is often less costly as compared to the sum of the costs of unconsolidated debts. While it is much simpler to make one payment each month rather than twenty smaller payments to separate creditors which are due at different times each month, simplicity doesn't always translate into savings. Before taking out a debt consolidation loan, it is important to understand all of the fine print to ensure that this move makes financial sense.
The first step in comparing your existing debt with the potential savings from a debt consolidation loan is to list all of your current debts and to note the interest payments and fees associated with each one. Add them up, and then you can compare the total with what your interest payment would be if you were to consolidate all your smaller debts into one new larger loan.
Debt consolidation loans offer a number of potential benefits, such as:
- Save on Interest. Debt consolidation loans typically offer lower interest rates as the loan is secured by the equity in your home;
- Make a Single Payment. Debt consolidation loans offer the ease of making one payment to a single creditor each month rather than trying to remember to make multiple payments;
- Repayment Schedule That Fits Your Budget. Getting a debt consolidation loans allows you to choose a repayment schedule that fits within your budget.
To get the best deal on debt consolidation loan, it's important to shop around. If you own a home, a home equity loan or home equity line of credit can be an excellent way to consolidate your debt. Be sure to talk to your local credit unions, as well; typically, the interest rates charged by credit unions are lower than many other lenders' rates. You can also investigate low-interest credit card offers; just be sure that you can pay off your debt before the introductory period runs out and the interest rate reverts to a much higher level.