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How To Use Debt Consolidation Loans
Perhaps you want to get out of debt, and perhaps you just want to get a little more breathing room in your monthly budget. In either event, you might benefit from a debt consolidation loan. A debt consolidation loan is a special loan used to pay off multiple other debts, replacing the multiple bills with a single lower payment. The trade off to this is generally in time, and sometimes in interest -- such loans have a longer repayment period in order to get the monthly payment down, and often as a result of this a higher cost of interest over the long term than simply paying off the original obligations would entail.
Debt consolidation loans come in two forms: secured, which generally has favorable interest and is secured by equity in your home or another asset; and unsecured, which tends to have a higher interest rate but does not attach to any of your assets. In either event, these loans will generally have higher interest than any mortgage or most car loans, but lower than most credit cards.
To help decide if a debt consolidation loan is right for you, you must first take stock of your financial situation. Make a list of all of your unsecured debt, the total balance, the monthly payments, and any annual fees or dues which are applied. Also note the interest on the loans -- generally unless you are desperate to reduce your monthly payments, it is better to not consolidate loans which have a lower interest rate than loans you can get to consolidate them (even though the loan will reduce the payment, it will increase the total amount repaid due to higher interest and longer repayment terms.)
Once you have arrived at a figure, use your local yellow pages and online search engines to get an idea of what debt consolidation loans might be available to you. Be very careful when shopping for a potential loan company -- this field is filled with bad players. It might be best to start with your own bank, mortgage company or even one of your credit card companies (who might not offer loans, but might be able to make a referral for you.)
Avoid any company who will not give you at least a general information quote without a fee being paid, and without getting a credit report on you. This will leave you with a (hopefully short) list of potential companies. Start with the one that is offering the most information, even if it is not the best information -- companies that offer the most disclosure up front tend to be the best companies with whom to deal.
Try to ultimately get at least three different quotes, but be careful about authorizing too many inquiries to your credit report as an influx of credit applications can negatively effect your credit rating. One question that needs to be asked of each is about early repayment penalties -- if you are serious about debt reduction or getting out of debt, you need to have a plan to eliminate this loan too. The purpose of a debt consolidation loan for you is to get your monthly commitments down, but the reason to do that is so that you can ultimately free yourself from the responsibility entirely!
Once you have received the debt consolidation loan, reduce your total amount of potential liability by closing at least some of the accounts that have been paid down. This will help you stay focused on debt reduction, and reduce the temptation to run the accounts back up, risking going into arrears and ruining the progress you have made.
Don't close all of the accounts -- keep some for emergency purposes, and to keep some open and active accounts on your credit record. Use them sparingly, and pay the full balance due when the bills come. And what to do with the extra "elbow room" in your monthly budget that the lower monthly payment gives you? Expert opinion varies, but we recommend dividing these savings by three, and applying one third to further debt reduction, one third to savings, and one third to your "general funds." This will help you get out of debt all the more quickly, while building savings and still allowing you to enjoy some of the immediate benefits of lowered payments.
You have a duty to yourself and your family to keep this debt under control, and no one will be watching but you -- so when you see that thing that you feel you absolutely must have, reach for your debit card, not your credit card. If you can't afford it, maybe next month.
One special consideration with debt consolidation loans is student loan debt. Special federal laws apply to student loan consolidation, and you should look into those laws and options available to you outside of other consolidation plans.