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The Pros and Cons of Consolidations Loans

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Authored by Lori Godin in Loans
Published on 12-11-2008

Consolidation loans may seem like an easy way to eradicate credit card debt, making the transition between multiple monthly payments at a high interest rate to lower monthly payments to one creditor, at a lower interest rate. Unfortunately, many people who consider a consolidation loan don’t take into account the terms in which the loan will be repaid. Consolidation loans come with lower monthly payments because of the longer term.

There are many benefits to a consolidation loan. For those people unable to make the minimum monthly payment, a consolidation loan could mean protecting the credit score. Once payments become late on a regular basis, or missed – the credit score is going to suffer. For this reason, many companies and individuals turn to consolidation loans to preserve the credit rating and repay the debt in an organized manner.

Consolidation loans come at a lower interest rate. With the average interest rate for a credit card being upwards of twenty percent, consolidation loans are a welcome transition – with rates ranging as low as seven percent. A consolidation loan may be the answer for individuals trying to maintain low cost debt, or decrease the costs of their debt. The higher the interest rate, the higher the minimum monthly payment becomes.

How long are you going to pay for these decreased rates? Consolidation loans are often given to customers for extended periods. For twenty thousand dollars in credit card debt, a customer may be offered a loan term of up to ten years. Is this credit card debt really something that you want to be paying ten years down the road?

How is the money allocated from the consolidation loan? There are some companies which negotiate with creditors to obtain lower payments, and the credit rating may suffer. Like any debt repayment plan, the idea is to preserve the credit rating. Understand all the terms associated with the loan and stay in control of the funds, ensuring that accounts are being repaid.

A consolidation loan may seem like a good idea – but many customers do not think the idea through. As an alternative, a strict budget and debt repayment plan may be implemented to pay debt as much as fifty percent quicker, compared to the term of the consolidation loan.

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