Debt consolidation, in short, is taking out one larger loan with a bank in order to pay off a lot of other smaller loans or debts. This is often done to get oversight, and to secure a lower interest rate. Whether or not to get a consolidation loan or not really depends on the situation you are in, and if you have other debt reduction strategies available to you.
When you find yourself in a situation where you have many different rather small loans like credit cards, it can become confusing, and easy to miss a due date for a repayment. Sometimes you don’t even know all your creditors and you have lost the complete oversight of your financial affairs. It can also be that you have some different loans, but you simply cannot afford to pay for all of them anymore. In these types of cases, a consolidation loan can provide an efficient solution, but it should be thought about very carefully.
When the consolidation loan you apply for is an unsecured one, it is simply putting a number of unsecured smaller loans into one larger unsecured loan. You only have one loan to commit to and you know exactly to who you owe money and how much. It can provide a feeling of control over your financial situation, and gives peace of mind that your debts are all in the one place.
It can also be that the bank you have asked for a consolidation loan is going to ask for some type of security. This can be your home or your car. They seek security to provide them with a fallback plan if you don’t make your monthly payments. If you do not make the scheduled repayments, the bank can then sell your house or your car in order to get back their money. In this case the loan you are getting is a secured consolidation loan. The financial benefit of a consolidation loan is generally simply a lower rate of interest.
Especially when you have assets to serve as collateral (another word for security) the bank often gives you a discount on the interest rate. Also when the bank takes over your smaller loans, they start a conversation with all of your creditors and may be able to take over your smaller loans and discount the amount of the loan, especially when you are in a situation where bankruptcy is not far away.
Whether or not to go and try to get a consolidation loan is really just about doing the math. The interest rates you are paying versus those available on a debt consolidation loan will help you decide whether or not to go for it. When you have a lot of credit card debt and you are paying outrageous interest rates, even an unsecured consolidation loan will be cheaper. However you still have to be realistic and be honest with yourself about whether or not you can pay for the loan, not just at this moment, but also in the future.
Especially in the situation where a bank has requested security over your house or car, keep in mind that you might lose your job or get sick and will you then still be able to pay for the loan. However, it may be that a bank can provide insurance to meet your loan repayments in the event of ill health or loss of income.