Categories: Debt Consolidation

What is a debt consolidation loan?

Following the 2008 economic downturn, many people who formerly had good credit and a strong history of paying their debts on time found problems in making regular payments. What many of these people found as they missed payments for credit card and mortgage debt was the interest rate used for their credit cards began to rise as they missed payments or exceeded their credit limit. In turn, this caused their credit score to drop and a large amount of ensuing problems began, such as difficulties with finding employment and future loans with a bad credit history.

Many people decided to take advantage of a debt consolidation loan in a bid to minimize the impact of credit card and secured loan debts, which made it a little easier to make monthly payments and reduce the principal amount of a loan. Debt consolidation loans are available to most people and are used to reduce the number of payments made each month on a variety of debts. A financial company will pay off the majority of debts owed by an individual to credit card companies, auto loan companies and to banks or credit unions. In return, the debt consolidation loan used to pay off the debts is calculated and the consumer makes monthly payments to the debt consolidation loan company to pay off their debts over a specified period of time.

Although the majority of debt consolidation loans are offered at a higher interest rate than conventional secured loans, these loans are popular as they offer a single payment that does go someway to paying off a number of debts in a single shot each month. One of the major problems the majority of people struggling with debt have when attempting to pay off credit card and student loan debt is how to make more than the minimum payment each month. In most cases, the minimum payment simply pays off some of the interest gained over the preceding month.

A debt consolidation loan should be investigated before making any decision on whether to use this method to get out of a high level of debt owed to many different creditors. Using a debt consolidation loan can be a good way for many people to find a way out of crippling debt and begin to turn around their finances to return to good credit and reduce their monthly bills. It is important to ensure the monthly payment made towards repaying a debt consolidation loan is within the monthly budget of the person repaying the loan.

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