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A debt consolidation loan sounds like the ideal solution when you have bad credit. However, things are not always straightforward when it comes to getting a consolidation loan as it often involves a third party provider. This provider has their own objective and it generally involves making a profit from you.

If the new loan taken out is used to pay off the balances on other existing debt then it should alleviate any immediate problems with meeting repayment requirements, but the rate of interest and period of repayment for the consolidated loan is not likely to be favorable. In theory a consolidation loan for either credit card debt or other smaller loans can reduce overall monthly payments. However, the total period you remain in debt is often extended considerably to allow a lower monthly repayment.

If you have bad credit it is normal to assume the rate of interest will be higher than the average rate charged. This is due to the lender viewing an applicant with bad credit as a high risk customer. The loan consolidation company uses this to their advantage as the rate of interest normally charged will often be lower than credit card interest rates. This makes it seem more appealing even though the repayment period is extended and the interest rate is higher than other loans approved for people with good credit.

In addition, there are some potential pitfalls to look out for as repaying other loans early can result in an early repayment penalty while repaying a credit card balance can still have some outstanding interest accrued and applied the following month. It is important to take this into consideration when applying for a consolidation loan as it may be difficult to meet the new loan repayment if ignored.

On top of the pitfalls there may also be an arrangement fee charged for negotiating a consolidation loan. The fee may be payable upon receipt of the loan or may be payable when the loan agreement form is signed. This additional cost is not always charged as it depends whether you initiated the loan request with an established loan provider or whether you requested the service of a debt repayment specialist.

On the positive side of things, whenever the consolidation loan has been received and other debt paid off it can have an immediate impact on your credit rating. The positive impact is due to a reduction in your debt to credit ratio as your total credit level is extended but your percentage of debt has decreased. In addition, any smaller loans paid off will be viewed as a positive thing on your credit report and provides future lenders with some evidence of you having met previous loan obligations.

If a consolidation loan is agreed then it is essential that any repayment figure agreed is always paid as failure to keep up payments will undo the credit repair process and make it more difficult to get future loans.

Overall, taking out a new loan to consolidate existing debt is not always necessary as it can just prolong the problem. Instead, it may be better to look at ways to reduce your existing debt burden. This can be achieved by setting up a budget, exploring options on how to eliminate credit card debt or restructuring existing debt and figuring out which credit cards should be repaid first.