The economy is tough, and many people are looking for ways to help them manage and eliminate debt. With the rising cost of living, it can be tough for many consumers to even make the minimum payments each month on credit cards, charge cards and loan payments. If you are one of these people, there are several options available to you. One of those options is combining a lot of small debts into larger debt consolidation loans. However, before you make any decisions regarding your credit and debt situation, you should know how debt consolidation loans work. Having all the facts can help you choose the right option for your personal situation and avoid any unmanageable circumstances.
The Loan
When you apply and are approved for debt consolidation loans, a lender extends a loan to you in an amount sufficient to cover any outstanding debts that you are looking to consolidate. When you apply for the loan, your bank or credit union may require a list of account numbers and balances before they will approve the loan, so make sure you have a record of this information.
Many times, the lender may directly pay the creditors with the balance of your loan. In other instances, the lender will issue a check for the balance of the loan to you, and you can dole out payments to your creditors on your own. After you pay off the accounts that you consolidated, your bank may require you to close the accounts as a term of the loan. In some cases, you may be allowed to keep the accounts open to keep your credit score from taking a nose dive, but there are dangers associated with both of these scenarios.
Benefits:
When you use debt consolidation loans to consolidate your debts into one loan, you have the convenience of being responsible for only one monthly payment. This simplifies record-keeping and makes it easier to get the payment made on time each month. A single loan payment is less than multiple credit card and loan payments. In addition, you may be able to get a lower interest rate on the loan than you were paying on your credit card accounts. If you do a lot of business with your bank, this may help lower your interest rate as well.
Dangers:
Back to Square One -
When you use debt consolidation loans to pay off your accounts, there are several pitfalls that are waiting for you. If you choose not to close the old accounts once they are paid off, you may be tempted to use them again at a later date. If an emergency happens, you can find that your credit cards are maxed out again. Now you have both a debt consolidation loan to pay on, as well as the old accounts that were once paid off. This can be a true hardship for most people, especially if you were barely making ends meet before you obtained the loan.
Lowering the Score -
If you do close your accounts once you pay them off, your credit score may take a sharp dive. However, it may be more beneficial to close your accounts and take the temporary drop in credit score than keep them open and risk using them again.
What Should You Do?
So, what's the answer to the question? Do debt consolidation loans really work? This depends on what your goals and needs are. In situations where you are able to make full and timely payments on your debt, debt consolidation loans are the way to go. This is because these loans require a strict payment plan in order to be successful.
If you are dealing with a debt that has spun out of control, this is not the best solution. In this situation you likely need a new beginning, a clean slate. Debt consolidation loans simply transfer your debt from point A to point B; and this won’t help debtors struggling to keep up with their payments.
Eliminating debt is not a quick and easy process. If you consider bankruptcy as an option, start by consulting a bankruptcy attorney to discuss all of your debt elimination solutions.
