What is a Debt Consolidation Loan?

If you're smothered in debt but still have reasonably good credit a debt consolidation loan might be right for you. A debt consolidation loan is a low interest loan used to pay off many creditors at once. The result is lower monthly payments, an extended payment schedule and a reduced interest rate on your debt.

How does a debt consolidation loan work?
For a debt consolidation loan to work the interest rate on the loan should be lower than what you're currently paying on your debt. Let's say you owe $20,000 to five different creditors at rates between 10%-20%. You would borrow $20,000 at a rate below 10% and use it to pay those five creditors off. In that one move you will have eliminated five high interest rate creditors and turned them into one lower monthly payment. With the money you save each month you can now start to pay down your debt.

Where can I apply for a debt consolidation loan?
You can apply for a debt consolidation loan from traditional lenders like banks, savings and loans and credit unions. If you have a good relationship with your bank start there but be sure to look around for the best rates available.

Am I eligible?
You can apply for either a secured or an unsecured debt consolidation loan. A secured loan is one where you've put up some of your personal assets as collateral. The advantage is that you can generally get a larger loan this way. The danger of course is that you risk losing those assets if you stop making payments somewhere down the road. If you have no assets to put up you still may qualify for a smaller unsecured loan. If you have trouble getting either loan some lenders may be willing to grant you a debt consolidation loan provided you have a friend or family member cosign. Just be aware that the cosigner is personally responsible for the payment of the loan and their credit rating will be damaged if you default. Think long and hard about the risk to your relationship with someone before asking them to cosign a loan.

What if I get turned down?
If a debt consolidation loan doesn't work out for you there are other loans options that can help you to consolidate debt like refinancing your mortgage, taking out a home equity line of credit or borrowing against your 401K. You may want to consult a credit counselor to help find out which option is right for you. Either way you won't be able to get out of debt over night but with some sound advice and a disciplined approach you can quickly start heading in the right direction.

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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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