What is a Debt Consolidation Loan, Exactly?

A debt consolidation loan is a type of loan that can be seen as an effective way to refinance
your debt. In other words, it means taking out another, bigger loan to pay off your other
current debt. It is seen as a financial solution where instead of having a number of monthly
repayments; only one repayment is made once all the other debt has been paid off. In a
nutshell, it is taking out a new, single loan, at the lowest possible interest rate, to pay off a
number of smaller debts. This may be an excellent respite for some, but should be carefully
considered before making the decision.

 So how does it work?

If you are approved for a debt consolidation loan, the credit provider will pay off all your
outstanding loans. (Bear in mind that there are strict criteria to meet in order to qualify for
such a loan.) Thereafter, you’ll just need to pay the instalments of the new loan. This type of
loan also usually has a longer loan term period than other types of loans. As such, this then
lowers your monthly instalments. When your outstanding debt has been paid in full, your
loan accounts are then closed.

What are the benefits of a consolidation loan?

  • It will reduce the number of your creditors to just one.
  • It simplifies your repayments
  • Makes it easier for you to budget
  • You can pay a lower interest rate
  • You’ll never miss a payment again

While the benefits of a debt consolidation loan seem obvious, it must also be considered
that it takes discipline and structure to ensure that the consolidation loan is used for what it
is intended. Many people find that they have a little extra cash at the end of the month after
paying their monthly instalment. Instead of using this money wisely, some people are
tempted to use it for their ‘wants’ and not their ‘needs’. This can become a cycle, leading
you to the same problem there was in the beginning.

If you need more information about whether a consolidation loan is right for you, speak to
one of our experts at One Debt.