Consolidation Loans 101

Many Americans are currently in a daily struggle with their debt. If you're one of them, sick and tired of late payments, multiple outstanding loans, possible wage garnishment and constant phone calls from persistent bill collectors, you're no doubt searching for a viable solution. Consolidation loans may be able to help you.

Keep this in mind before you sign up for a consolidation loan: you're signing on for a brand new loan. Here's how it works. A lender will buy the existing amount of your debts and bundle them (for lack of a better term) into one loan. This helps to lighten the burden of debt on many peoples' shoulders.

Many factors come together to make consolidation loans an attractive offer. To begin with, it can be hard to keep track of due dates if you owe loans to more than one place. It can be easy to miss one payment because you're preoccupied with another. Furthermore, when due dates fall between paychecks, it can be difficult to stretch your money through the end of the month.

Debt consolidation isn't a cure-all for these problems, though. In most cases, your lender will do their best to get a hold of the loans at a lower price. However, they'll turn your new loan around to you at a higher interest rate. This is a general factor if you have any outstanding payments, poor credit history, or a habit of late payments. You're paying for the convenience of one bill, which in some cases isn't worth it.

Having a consolidation loan can also negatively affect your credit score. When examining your credit, there are a lot of factors that credit bureaus will take into account, and one of those is consolidation loans. Bureaus will notice if you haven't closed some of your accounts (which happened when your lender bought the loans), meaning you've consolidated. This just looks bad on you, because it appears you doubled your debt instead of consolidating. Once you've damaged your credit score, it's a tough road to get back into good standing.

There are instances in which consolidation loans are a good option. These instances include foreclosure and bankruptcy. Examine all your options though. As mentioned above, don't just pay for convenience. If there's a way for you to handle your loans on your own, it's typically better to do so. If it's gotten too far out of hand, then it's time to consider a consolidation loan.

If you do choose the debt consolidation loan route, make sure to treat it as the clean slate that it is. Don't fall back into a pattern of poor payment habits. Do your best to pay on time, and pay as much as you can. This reflects well on your credit score.

If you can manage your debt outside of consolidation loans, do so. They're a great option for those that really need to take advantage of them, but otherwise it's better to try to shoulder it on your own.

I'm a finance professional specializing in debt consolidation programs. Check out churchwoodfinance.co.uk for more information.