What is a consolidation loan and when should you get one?
If you have been looking for a way to get out of debt, you have probably heard of the term “consolidation loan.” Some finance professionals claim it is the best option to get out of debt, while others claim it will do nothing but trap you in a further cycle of debt.
So, what’s the truth?
Before we begin, let’s talk about what a consolidation loan actually is.
A consolidation loan is essentially a new loan you take out to pay off other, unsecured debts such as credit cards, medical bills, payday loans, and short-term loans. You are combining all of your various debts into one single loan.
What are the benefits?
A lower rate. When you carry multiple debts with multiple APRs (Annual Percentage Rate), you will pay a lot in interest by the time you pay off the debt. Consolidating your debt into one loan will give you a lower rate, and you will end up paying less over the life of the loan.
You only have to worry about one payment. You already have to worry about bills, insurance, and subscriptions. Throw in multiple credit card due dates, and something is bound to slip through the cracks. Taking out a consolidation loan means you only worry about one due date. No more shuffling money around and forgetting payments.
It is easier to pay down. With a consolidation loan, you can easily use any extra money you have to pay down the principle and pay off the loan faster. When you have multiple unsecured loans, it can be difficult to determine which debt to put extra money towards.
You can better plan your financial future. When you have just one debt to tackle, you budget becomes easier to manage, and planning for the future becomes a whole lot easier.
What are the risks?
It does not work if you take out more debt. A consolidation loan doesn’t work if you consolidate all of your credit cards into one loan only to turn around and charge more items to your credit cards. You’re only adding more debt to your name.
You can get stuck in a cycle of constantly consolidating. If you continue to take out debt on top of consolidating, you may decide to consolidate again… and again… and again in order to free up your credit. This cycle will only trap you in more debt.
Is a consolidation loan right for you?
A consolidation loan is right for you if you are committed to breaking the cycle and getting out of debt. It is the first step in making a lifestyle change and finding the path to financial success.
In addition to taking out a consolidation loan, it is a good idea to meet with a financial counselor. They can help you determine why you got into debt in the first place and help you make a plan to stay out of debt once you pay off your consolidation loan.
We offer a consolidation loan and free financial counseling to our members. If you would like to learn more about our consolidation loan, click the link below. If you would like to schedule a financial counseling session, give us a call at (504) 885-6871.