Whenever people become faced with a tough financial situation, invariably the idea of loan consolidation crops up. After all, wouldn't it be better to have just one loan at one interest rate, rather than owe half a dozen different institutions, each with their own rate of interest? While it would be easy to say yes, the truth of the matter is very much different. Depending on your specific circumstance, getting a consolidation loan could be a fairly bad idea. Here are few things that you should consider before you make your final decision.
- What is a loan consolidation? Technically speaking a loan consolidation is when a financial institution purchases several different loans, and merge them into one. While this can be seen in a wide variety of areas of financial life, it is most commonly seen in the area of educational loans. Financial institutions like to sell these because they will see some immediate profit (even if it is smaller in the long run) while the people receiving the loans get an "extension" and often times a lower interest rate.
- Determining eligibility. Eligibility for a consolidation loan often depends on the financial institution that is offering it. For example, some places will only accept you if you have a combined debt that is over $30,000, while another place will only accept you if you have a combined debt that is under that same amount. It is always a good idea to shop around and view as many different products as possible to see which ones you are eligible for, as well as what the various terms are.
- Benefits. There are quite a few different benefits to loan consolidation, and chances are most may appear to be fairly straightforward. For example, having a consolidated loan allows you to pay a single entity rather than several different ones, there are usually different kinds of repayment plans that you can choose from, and often it resets the clock on your loan so that you have more time to repay the loan. These, of course, are only a few of the various benefits; there are others, but often they are specific to a certain type of loan, and should be looked into carefully before being accepted.
- Drawbacks. As with most things in life, there are a few drawbacks to getting consolidation loan. For example, if you have any grace period on a loan that you are rolling into the consolidation, then you will loose that grace period. Many loans, such as student loans, will only allow you to consolidate a certain number of times (such as once) and then that is it.
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Interest rates are the fee charged for borrowing money. Interest rates can be directly tied to your credit score.