Living in debt isn’t anything new. Billions of people do it and the vast majority of Americans as well. In such troubling times, taking a debt consolidation loan to cover existing debt is a must.
In our 2023 guide, we will talk about what this type of loan is and how it works.
What Is A Debt Consolidation Loan?
To put it in very simple terms, you take out such a loan to refinance debt by paying off what you already own to creditors. In many cases, this is the smart thing to do, especially if you’re getting ripped apart by high fees.
It is surprisingly common to take this loan as it does indeed come in handy when you owe too much money to lenders. As always, when choosing the type of debt consolidation loan, you have to keep in mind a few things.
The first is the type of loan. Some people take personal loans to consolidate debt, others take credit cards, while an entirely different set of people take out home equity loans.
What all of these hopes to achieve is to pay off your outstanding debt by giving you more favorable rates. As for what’s the ideal option for a debt consolidation loan, you will have to do your research. However, you can read more about Credit Associates Cost for debt consolidation.
How Do Debt Consolidation Loans Work?
While these loans are indeed useful when it comes to getting out of a tight situation, that doesn’t mean you won’t still be in debt. The purpose of this loan is to help pay off what you already owe to creditors. With this loan, you will still be in debt and have to pay a monthly fee.
But what debt consolidation hopes to offer you is a better rate than what you’ve already paid. Another thing to take into account is that these types of loans don’t change the interest rates. That means the interest rate stays the same for the duration of the loan. It never goes up, and it never goes down.
These loans are a great way to go around high-fee debts that you have. Let’s assume that you have multiple credit cards and you’re in debt. Different credit cards come with different APRs. Some are 20%, others are 15%, and some can be as high as 25%. By taking out this loan, you can pay off all three credit cards and pay an APR of 10-12%.
This is how they work and why they’re so convenient for debt consolidation. The purpose of these loans is to help you, not harm you. While saving on interest fees is an obvious benefit, another benefit is that they make each monthly payment simple and straightforward.
Instead of paying multiple loans, you combine the payments into a single one. This reduces the chance of error and missing out on a payment. Late payments and missing out on payments is not what you want when looking to improve your credit score. Also, refinancing is a great way to add a few points on your credit score.