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A debt consolidation loan

a debt consolidation loan

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Consolidation Loans

We get lots of questions about debt consolidation at Credit.com and that's because there are so many ways to consolidate debt. Let's start with the basics: debt consolidation refers to the act of grouping all your different debts into one single debt. For example, say you have three credit cards and decide to use debt consolidation to combine all three into one larger consolidation loan. In that case, the new loan would have a balance equal to the sum of the other loans.

There are a few ways to consolidate your loans. You've probably heard of credit card balance transfers. but another option is a personal loan. They require you to get a loan from a bank, credit union, or peer-to-peer lender who will agree to consolidate some or all of your debts (usually credit card balances) into one new loan.

If the interest rate on this new personal loan is lower than the interest rates on the different credit cards that you are consolidating, you'll save money. In addition, you'll have a fixed payment schedule that requires you to pay back the debt in 2 - 5 years (depending on the terms of the loan). That can help you avoid the minimum payment trap that can keep you in debt for years to come.

Sometimes what appears to be debt consolidation isn't. For example, a debt management program (DMP) through a credit counseling agency allows you to make one monthly payment to the counseling agency, and in turn, the agency pays all of your participating creditors. However, the agency doesn't pay off your debts so it's not a true consolidation loan, even though it may have the same effect as one.

Disclaimer: The person depicted is a model accompanied by a testimonial for illustrative purposes only.

Category: Bank

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