Getting a Debt Consolidation Personal Loan

Finding yourself overwhelmed with debt is one of the worst feelings in the world. On the bright side, people with crushing debts have many more options today than they did just a few short years ago. One potential way to liberate yourself from your debts is getting a debt consolidation personal loan.

What is a Debt Consolidation Personal Loan?

It is technically possible for someone who is $25,000 in debt to walk into his bank, apply for an unsecured loan for $25,000, get the loan, and then use the money to pay off his debts. In reality, however, this is unlikely. The reason is that someone who finds himself so deeply in debt that he is struggling to make his payments - and thus is looking for a way to get out of debt quickly - would probably not be able to qualify for an unsecured personal loan. After all, the bank has no way of guaranteeing that you will use your money to pay off your debts - as far as they're concerned, you might just end up being $50,000 in debt instead of $25,000, and then you'll really have no way of paying back any of your debts.

Debt consolidation loans, on the other hand, are offered by special debt consolidation firms. Instead of writing you a check for $25,000, they would actually pay off all of your debts for you, and then you would owe them the $25,000. The idea is that you would now have only one payment to make each month, instead of several, and hopefully, your new debt consolidation loan would have a lower interest rate than your older debts. Also, by spreading your debt consolidation loan out over a longer period of time, your monthly payments could be lowered as well.

The Pitfalls of Debt Consolidation Personal Loans

Your debt consolidation loan should definitely accomplish at least one of the two following goals, hopefully both: 1) Lower average interest rate; 2) Lower monthly payments. However, it is possible to achieve one without the other, and you should be aware of the consequences. For example, if you were paying an average interest rate of 14% on five different loans, and your debt consolidation loan was 18%, your monthly payments could still be lower if the payments were spread out over a longer period of time. This isn't necessarily bad - but you have to be aware of it and make an intelligent financial decision. It may be most important for you to get your monthly payments down, and you might be willing to pay more in interest in order to achieve that objective. That's perfectly valid, so long as it is your informed choice.

Also, it's important to note that by spreading your payments out over a longer period of time - say to ten years from an average of six - you will be paying more in total interest over time, even if your interest rate stays the same. In fact, you might be paying more interest even if your interest rate is lowered! Again, this does not necessarily make the debt consolidation loan a bad deal, you just have to be sure that you're aware of all of the consequences.

More seriously is the question as to whether or not your loan is secured or unsecured. An unsecured loan is preferable, but will normally come with a higher interest rate. You should be able to get an unsecured loan if your credit is good and you are employed, but otherwise, you'll probably have to opt for a loan that is secured by your house. This means that if you fail to pay, the debt consolidation service could force the sale of your home to make sure that they get repaid! For this reason, it may be wise to see about getting a home equity loan or home equity line of credit instead of a debt consolidation loan.

Oh, and if you don't have your own home, you may be out of luck - debt consolidation loans may not be for you. But fortunately, as stated at the opening of this article, there are many other options these days. Browse around Debt Relief USA to see what's available!

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Please Note: Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
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