When And How Debt Consolidation Works

The main aim of debt consolidation is to allow people who are having trouble managing various debts to consolidate all of them into one. Most people prefer to manage one loan rather than deal with several different bills or due payments each month. By grouping all loans into a larger one, a lower monthly payment or a lower interest rate can be obtained.

For instance, the owner of three credit cards with interest rates of 12%, 16% and 25%, might be able to consolidate those three accounts through a personal loan with an interest rate of 10-15% and, thus, save money.

Debt consolidation loans penalties for any missed payments, a consolidation loan is a great way to avoid those as well, even if it means accepting a larger repayment period. However, it is important to remember that a lower monthly payment means paying more as interest, for the additional months or years (http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/).

There are several institutions that offer consolidation loans such as: credit card companies, banks, mortgage lenders, credit counseling companies or peer-to-peer lenders. Most debt consolidation options involve credit card balances or student loans, but other types of debt can be consolidated, as well.

The most important thing when consolidating debts is discipline: making timely payments and refraining from any unnecessary expenses. Once part of their debts are paid, many people forget the troubles they had and start spending again. New debts pile up and, before realizing it, they have even more debts than before.

But there is more to debt consolidation than that. When repaying the initial debts, one may be liable for early repayment fees, and, in some cases, these fees end up quite costly for the one paying them. Thus, if the interest rate on the consolidation loan is not significantly lower than the interest rates of the debts being consolidated, the consolidation may not be very helpful.
As for the possibility to lower one’s monthly payments by extending the repayment period, the extension years mean additional interest and responsibilities for the borrower, so it only works for those who have a steady job and a fix income.

Debt consolidation can make help one regain control over their financial situation in most cases, but can also turn into a disaster for undisciplined borrowers who cannot follow up with their payments.