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What is a Debt Consolidation Loan?

Oftentimes while scrambling for quick access to cash, it’s easy to find yourself with several small loans and payday loans out at once. These loans often carry high fees and interest rates, making the burden of debt even heavier. Fortunately, you have options worth considering to consolidate debt and save money.

What is Debt Consolidation?

When you consolidate debt, you’re essentially paying off all of your loans from different lenders by taking out one large loan from a single lender. The biggest reason you would want to do this is to save money on interest. If your outstanding loans have high interest rates, especially if they’re payday loans or other small installment loans, then you might be able to find a better rate elsewhere. Another advantage is that you only have to remember to make one loan payment each month, so you’re less likely to forget and get hit with several late fees.

Consolidating Debt with a Personal Loan

One of the most straightforward ways of consolidating your debt is by taking out a personal loan. You can apply for one through a bank, credit union, or online lender. The latter two are generally better options for people with lots of debt or bad credit. Most lenders only perform a soft inquiry on your credit report to give you an offer on interest rates and loan terms, so it won’t hurt your credit score to shop around. Once you have offers, calculate how much interest you’ll pay over the entire length of the loan. If switching to one personal loan can save you money over the long run, it’s definitely worth considering. Another advantage is that making regular, on-time payments through a personal loan can increase your credit score. Yes, the debt remains the same, but payday lenders don’t report payments to the credit bureaus so you’re not doing yourself any extra favors when you make timely payments. Personal lenders do report to the credit bureaus, so you’re actually rewarded for paying off your debt.

Enrolling in a Debt Relief Program

If you feel like you’re drowning in your debt and won’t ever be able to repay your loans, you could also consider a debt relief program. Carefully weigh each option, because different types of programs affect your credit in different ways. Here is a basic overview of some of the most common options:

  • Credit Counseling: Helps you develop a personalized plan for your finances, including budgets and debt management. Despite being non-profit organizations, most still charge a fee, so do your research to find a reputable agency.
  • Debt Management Plan: Pay your debts through a credit counseling agency. They may help negotiate lower fees and balances. Plans typically take two years of consistent monthly payments and you usually can’t use any credit while on the program.
  • Debt Settlement Program: These plans can be risky because you typically stop paying your creditors while the debt settlement company attempts to renegotiate the amount you owe. You also might be asked to pay monthly deposits while the accounts are being settled and your credit score will likely go down for some time.

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