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Debt Consolidation Loans

What You Should Know

For the millions of Americans juggling multiple debts, the thought of paying the bills every month can be exhausting.

Just keeping track of the multiple payments and due dates can be daunting, and for many, being able to cover the multiple payments each month can be a challenge.

However, there is a possible solution to this financial struggle - a debt consolidation loan.

How a Debt Consolidation Loan Works

A debt consolidation loan is a new loan that is used to pay off other debts and thereby consolidates those debts into the one loan. Debt consolidation loans come in the form of unsecured personal loans or secured loans, such as a home equity loan.

Applying for a debt consolidation loan works in the same ways as applying for other types of loans. Your overall credit history and rating will be considered by the lender to determine the amount of the loan and the loan's interest rate - the better your credit score, the more the lender will approve and the better interest rate you can secure.

In the case of a home equity loan, the amount of equity you own in your home also is considered. The lender first will determine the appraised value of your home and then bring that amount down to a percentage of that value - generally 75 percent to 80 percent of the appraised value. To determine the potential loan amount, the lender then will subtract the amount you still owe on your mortgage from the adjusted home value.

How a Debt Consolidation Loan Can Help

There are several ways in which a debt consolidation loan can help those in challenging financial situations.

The first way such a loan can help is by simplifying one's monthly bills. A debt consolidation loan can replace multiple bills with multiple payments and due dates with one monthly payment.

A debt consolidation loan also can provide lower monthly payments for the borrower. Debt consolidation loans typically offer low interest rates and extended repayment periods, which result in a monthly payment that is less than the total payments one might make on multiple credit cards each month.

Additionally, if you secure a home equity loan, the interest paid on the loan is tax deductable in most cases.

Risks to Consider When Securing a Debt Consolidation Loan

While a debt consolidation loan can seem like the perfect solution to one's monthly financial juggling act, there are potential risks involved with this type of loan that should be carefully considered.

The first risk that one should consider is the borrower could end up paying more in the long run with a debt consolidation loan. While the interest rate on a debt consolidation loan is generally lower than many other forms of debt, the repayment period is often longer. This extended repayment period could result in an increase in total interest accrued. Additionally, any fees associated with the loan could offset the benefits. Remember, the goal is not only to simplify and reduce your monthly bills but also to save money.

Additionally, if you consolidate your debt through a home equity loan, you should keep in mind that your home is now on the line. If you default on your home equity loan for any reason, you could lose your home. Therefore, it is very important to be certain that you will be able to afford the monthly payments on a home equity loan before going that route.

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