I’ve heard of debt consolidation loans that some banks offer. How do those work? Is your credit affected? If I plan on paying off two or three high interest credit cards in the next few months, would it be better to consolidate it all into a lower interest loan or is that even a possibility?

A debt consolidation loan is one where the lender loans you enough money to pay off other loans, thereby converting several loans to one. There could be three advantages to taking out a debt consolidation loan: convenience (only one payment to make each month), a lower overall payment (this is because a consolidation loan can usually be done on a long- term basis, thereby spreading the payments out over a longer period of time), and a lower overall interest rate (this is because, typically, the higher the loan amount the lower the rate). Your credit should not be affected on a straight consolidation loan as long as the payments are kept current.

Be cautious about loan fees and the total amount of interest paid over the term of the loan, however. Just because you have a lower interest rate doesn’t mean you will pay less interest on the loan, so ask about that at the time of application. And loan fees can be excessive with some consolidation loans. Those are the up-front fees that are not included in the note rate, but are included in the APR (Annual Percentage Rate). Ask about those, too, at the time of application.

There may be other costs involved such as recording fees if the lender will be taking a security, like a car or other asset. Sometimes the advantage of offering a security is that the interest rate will be even less than it would if the loan were done on an unsecured basis. So, ask your lender about that at the time of application, as well.

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