A debt consolidation loan is where a bank, a credit union or a finance company provides you with the money to pay off your outstanding credit card debts and “consolidates” them by bringing all the loans together into one big loan. People usually apply for a consolidation loan when they have trouble paying up even for their minimum monthly payments. There are certain advantages as well as disadvantages for a loan like this, lets have a look at them.
In a debt consolidation loan the lender will credit you the money to pay off your existing debt by lending you the money you need. For example, if you have 4 credit cards and you owe a combined Rs. 1,00,000 on them, when you ask your lender for a consolidation loan, they will lend you the Rs. 1,00,000 provided you qualify. The lenders then pay off your existing credit cards dues, close those credit card accounts, and then you make one monthly payment to your lender for the Rs. 1,00,000 you borrowed.
Keep in mind that If you don’t have a realistic actively used household budget, after a few months of clearing the loan payments, you might be struggling again and re-applying for new credit cards. When this happens, you could be actually doubling your debt, rather than paying it off with a consolidation loan.
Additional Reading: Understanding the basics of debt consolidation
The main advantage of taking a debt consolidation loan is that your current debt of all the build up of credit cards dues, the household bills, and even overdrafts on your bank accounts which you were struggling to pay up is cleared. Unsecured debt consolidation loans take the pressure off by paying lots of different bills each month and even those due from the past.
One of the main reasons why a debt consolidation loan won’t work is when people don’t use a realistic household budget. It’s essential to manage routine bill payments, loan payments and annual expenses both the regular and unexpected expenditures more rigidly when you have undertaken a consolidation loan.