What is A Debt Consolidation Loan
A debt consolidation loan is one big loan that a borrower takes out in order to pay off a number of smaller debts. It may also be referred to as refinancing one’s debt. There are three main reasons for taking out a debt consolidation loan: to lower the fee, or interest rate, of the loan; to make a person’s debt more manageable; and to reduce the size of the required monthly loan payment.
One reason people consolidate their debts under a new loan is to secure a lower interest rate (the interest rate on a loan is the percentage of extra money a borrower pays per year on top of the balance of money owed; it can be thought of as the cost of borrowing the money) or even simply to secure a fixed interest rate. Unlike a variable interest rate, which fluctuates according to changes in the economy, a fixed interest rate remains the same until the entire balance of the debt is paid off.
Some people take out debt consolidation loans in order to make their debts easier to manage. Rather than keeping track of several different payments to different creditors (or lenders), which may all be due at different times during the month, a debt consolidation loan enables the borrower to make one easy payment per month. With only one due date to remember, the borrower greatly reduces the risk of missing a payment and incurring costly late-payment penalties.
A third reason for a debt consolidation loan is that the minimum payment on such a loan is often less than the sum of several minimum payments on smaller debts. If the borrower uses less of his or her monthly income to pay off debt, it should be easier for him or her to handle basic monthly expenses for housing, food, utilities, and such. Some financial advisers say that if the borrower can live more comfortably within his means, he will be less likely to continue to build more debt.