Debt consolidation loans can be in many forms. They can be available through private companies as well as through the Federal Government. Nowadays, consolidating credit card debt is a very popular financial option offered by private lenders. On the other hand, student loan consolidation is a common type of government backed loan. Before you make your decision to consolidate your debts, you should first understand how it works. Here are 3 known truths about this typical loan:Debt consolidation is the process of combining different bills from various institutions and placing all the outstanding into a single loan. The interest rates for all the debts are consolidated too. This loan can be utilized to provide debt relief to the borrowers. In order to obtain the loan, in certain circumstances, the borrowers have to turn their unsecured debts into a secured debt. They are required to provide the loan providers with collateral. Although having collateral makes the approval process faster, it doesn’t benefit the borrowers most of the time. In fact, home equity is utilized and it may cause the refinancing or moving home more difficult in the future. Consolidating debt can lower your credit score. You need to bear in mind that 30% of your FICO score is determined by how much your debt is. Your debt-to-credit ratio plays an important role in determining your credit rating. Your score is lower if you use more of your available credit. When you take up a consolidation loan and use the full line of credit, your credit score can be adversely affected. Hence, you are advised to calculate your score carefully. One of the advantages of this loan is to reduce interest rate and lower your total cost. However, you will only achieve this if you utilize the loan in a correct way. In general, when a debt consolidation loan is obtained, the borrowers are offered an extension on their repayment period. It sounds ideal as the borrowers can have lesser monthly commitment. However, let’s calculate it carefully. You can find out the truth easily. When the repayment period is extended, you are in fact paying more interest over the loan duration. On the other hand, if you have missed or late payments, you will end up bearing higher annual percentage rate. In actual scenario, you are incurring most cost.

By knowing the truths stated above, I believe you will be able to make better judgment.