Layman’s terms describe a consolidation loan as a financial situation with the intention of taking out one loan to pay several other debts. Instead of having to pay multiple separate payments per month, a borrower can consolidate his cash into one payment. This is often done to secure a lower fixed interest rate over the course of the loan term.
Consolidation companies use the loan proceeds to pay off your existing debts, allowing you to pay one loan at a specific interest rate each month instead of trying to meet multiple obligations all month long. Often, consolidation offer better rates than many other types of consumer debts, meaning you can save money. However, there are disadvantages to securing a consolidation loan. While a borrower can still experience lower interest rates and payments due to the term being amortized over a longer period of time, the debt remains the same all throughout loan, with the main difference being that loan term has been extended.
Before taking on a debt consolidation loan, borrowers may want to consider using a debt consolidation calculator. These useful tools can help determine many factors for many financial situations, such as how long will it take to get out of debt, or how much interest can be saved if you get fixed interest rates. This can save you the time crunching up the numbers yourself and preventing unwelcome surprises in the future.