Finance — 2 years ago

What is Debt Consolidation Loan?

by Eddie V.

Debt Consolidation Loan, What is Debt Consolidation Loan

Debt Consolidation Loan Explained

In simple terms, Debt Consolidation is a process wherein a new loan is taken to write off old and unsettled dues. Individuals popularly prefer to take consolidation loan for settling student loan, credit card bill payments, etc. Customers are often bribed with low-interest rates or lower installment payoff options in case of more than one debts.

Therefore, Debt Consolidation is a method used by individuals for paying off old dues and debts. Many countries follow the practice of converting multiple debts into single debts.

How Does Debt Consolidation Work?

It is difficult for any individual to keep a track of debts, bills, installments, and creditors in case of multiple debts. In such situations, debt consolidation could be a handy option. Popular methods of debt consolidation practiced are; Debt consolidation by taking a loan and debt consolidation through ACCC - American Consumer Credit Counseling.

Debt Consolidation Loan

Debt consolidation by taking a loan is a method wherein an individual takes a lumpsum loan to reimburse to creditors and then the loan amount is paid off on a monthly basis. You can obtain such loans from debt relief companies, banks, or financial institutions.

Whereas, debt consolidation through ACCC is beneficial for settling unsecured loans. Under this method, ACCC acts as a middleman between creditors and consumers. The consumers need to make monthly payments to ACCC and in turn, ACCC makes the payment to the creditors.

Advantages of Debt Consolidation:

The advantage of Debt consolidation are listed below:

  • Debt consolidation helps in dealing with a single lender instead of multiple lenders.
  • Another advantage of this method is its environmental friendly since it reduces paper wastage. You will be receiving only one statement when you opt for debt consolidation method.
  • The burden of monthly repayments is condensed since you will be making a single payment in a month for multiple debts.
  • Savings in monthly repayments will be possible since the interest charges will be lower under debt consolidation method
  • You will be relieved from additional costs and fees relating to your loans or debts
What is Debt Consolidation Loan

Disadvantages of Debt Consolidation:

Debt consolidation has its own share of shortfalls too. The disadvantages are enlisted below:

  • The term loan repayment will extend automatically. You might reap the benefits lower interest rates and monthly payments but you will end up in extending the loan term.
  • Your credit score is likely to get affected in case you miss any monthly payments under debt consolidation.
  • You will be also risking your assets in case you fail to make monthly repayments.
  • You might miss out special rebates or discounts which the financial institutions offer on loans. These benefits are not available under debt consolidation
  • Money lending institutions often charge high amount of fees on loan consolidation. Instead, you can borrow a loan from the bank and keep yourself away from such hassles.
Debt Consolidation Loans


Debt consolidation will reduce the burden of paper statements, answering your lenders' phone calls, keep a track of date and time for monthly bill payments. The benefit of lumpsum loan, paying off the amount to creditors and making regular monthly payments might sound interesting and easy to deal with.

The decision of debt consolidation depends upon your financial situation and the type of debt consolidation method you will be using. The biggest relief under debt consolidation is you will enjoy lower interest rates and low monthly payments.

But extended loan terms might pose a problem in the long-run. Financial institutions end up charging you a high amount of fees on loan consolidation. As an alternative, you can opt for borrowing loan from the bank and keep a watch on your interest rates, monthly payments, budget, etc. So do your homework before you consider to consolidate your debts.

Learn about credit card debt consolidation and how it can help you!


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