Consolidation loans – what are they

To ‘consolidate’ basically means, to group a range of different things together. When we are talking specifically about finances and loans consolidating debt is to bring various lines of credit and monies owed together under one payment. To do this a loan is taken out to cover all of the existing smaller lines of credit and pay them off. You are then left with a single payment. There are various reasons for doing this and these can be explained below.

Consolidation loans – what are they used for, what are their benefits?

The first reason someone might take out a consolidation loan to pay off their existing debts is the lower the interest rate payments. Generally speaking, smaller lines of credit can have higher interest rates. For example many people have a range of credit cards, not just one, which they use. Credit cards can often have a high interest rate and as such you can pay quite a substantial amount of money in interest alone, not even including the actual capital payment needed. A common occurrence is for an individual to take out a new credit card, attracting by a low introductory offer. This can often be a simpler process then taking out a loan so is quite popular. However when the introductory period runs out the cardholder can suddenly be shocked by the percentage they have to pay each week in interest and find this mounts up. This example is just with one card, if many are held then this problem clearly multiplies. Consolidation loans at a lower annual percentage rate would save money in interest payments which higher rate cards can charges. If a consolidation loan is taken out to pay them all off then significant savings can be made.

The second reason is to re-arrange the payments and reduce outgoings. Whilst lowering the interest rate as above will help towards this, monthly outgoings will be lowered by increasing the term of payment. For example one thousand two hundred pounds paid over a year would be (not including interest) one hundred pounds per month payment. But over two years this would be halved and so monthly outgoings are reduced to fifty pounds.

The third reason is for ease of payment. Worrying about a range of different bills can be stressful and take some time in management. However with a single consolidation loan this will be far easier – there is a single line of finance to manage.