A debt consolidation loan offers a way for an individual to combine several debts into one loan that features a lower interest rate than that charged by the current lenders. Individuals make one payment per month rather than a separate payment to each individual lender. Debt consolidation loan companies offer the ability to consolidate credit card debt and even student loans into one payment.
Through this process, the independent company negotiates with each creditor to arrive at more favorable repayment terms. The individual then pays the consolidation company one monthly payment with a lower interest rate and the company uses the money to make the various debt payments to creditors. Debt consolidation loans offer a way for an individual to improve the credit score through making affordable monthly minimum payments, eventually eliminating the debts.
When considering debt consolidation loan companies, an individual should be aware of several things. Consolidation loans are not always easy to get, especially if the individual has missed making payments on existing debt. If the credit history is bad, the loan may carry a higher interest rate than the debts currently outstanding. Though the monthly payment may be lower, the individual will pay more over time.
One reason why the consolidation loan payment is lower than the payments for existing debt is that the repayment schedule is extended. In addition, debt consolidation companies often charge a fee that represents a certain percent of the monthly payment. The creditor is happy to provide a cut of the payment to a company who is helping them get the money owed.
Shopping for a debt consolidation loan company requires that an individual do some homework. Some companies are less reputable and can actually make late payments or skip them altogether, making the financial situation worse. It is important to thoroughly question each company and make sure that the best one offers services that the individual could not get on his or her own.