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Free Debt Consolidation Loan - Can A Debt Consolidation Loan Help You Become Debt Free?

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Virtually everyone is looking for the key to becoming debt free. Debt consolidation loans are often recommended as a way to achieve this, but what are they and do they really help?

A debt consolidation loan involves simply moving balances from several smaller loans or credit card accounts to one new loan. This new loan may be a “secured” loan (backed up by collateral such as your home) or unsecured (no collateral backing it). While even unsecured debt consolidation loans can have lower interest rates than the debts being consolidated, secured loans offer the best rates since they are backed by collateral.
How can moving these balances to one account help you become debt free? Consolidation in theory can lower your interest rate and monthly payments. Having lower monthly payments and paying less interest could help clear the way for you to become debt free. Consolidation such as this may work best when the majority of the debt being consolidated is credit card debt. Credit card accounts generally have a higher rate of interest than even unsecured loans, and, consequently, offer a greater potential for savings. Besides the financial savings, some people also enjoy the convenience of having all their debt in one place with just one monthly payment.

This plan sounds simple enough, but there is a downside. Those who are not disciplined about managing their money could find themselves in an even worse financial situation after consolidating. Let’s say you have three debts: a credit card with a $5000 balance, another credit card with a balance of $3000 and a car loan with a balance of $17,000. You consolidate these into a new $25,000 loan that saves you $400 a month. Now that you’ve paid off these debts, you start running up charges again on your credit card and decide to use the $400/month savings to buy yourself a new car. Instead of owing a grand total of $25,000 as you did before consolidating, you now owe a grand total of perhaps $40,000 and your savings on your monthly payments has been wiped out.

Another downside to consider is that the monthly savings from consolidating debt is simply a result of the term or length of the loan being extended. Rather than having three loans that would all be paid off in three years, you now have one large loan that isn’t scheduled to be paid off until five or six years from now. What you had saved by getting a lower interest rate, you’ve now lost by extending the loan for an additional two or three years.

If you are looking for a way to become debt free, consolidation could be an option worth considering, but only after you consider your spending habits as well as the pros and cons of debt consolidation loans.

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