Debt Consolidation Introduction
Debt consolidation is when a borrower uses one large loan to pay off several small loans, which typically include credit card balances.
The benefit is that the new larger loan has a lower interest rate and a longer repayment term than what the borrower was paying on previous debts. Typically debt consolidation provides lower monthly payments, easier bill-paying schedules and a reduced number of collections notices.
Another reason people turn to debt consolidation is that when they struggle to pay balances, and miss payments as a result, interest rates increase and late charges are applied. The result is that the borrower ends up paying tremendously more than what was originally owed, sinking the person deeper into debt.
When to Consider Debt Consolidation
Having a few hiccups in bill payments may not warrant immediate debt consolidation, however there are a few red flags situations to consider.
Borrowers should seriously ponder debt consolidation if they have maxed out credit card limits, are unable to make minimum payments, have charges which exceed the ability to pay each month and have mounting late fees or calls from creditors.
Debt Consolidation Products
One size doesn’t fit all for debt consolidation. Borrowers should consider their specific financial situation before selecting a debt consolidation solution. Get a FREE debt consolidation quote.
Home Equity Loan
If the borrower is a homeowner and has decent equity in his or her home, a home equity loan is a possibility. Borrowers can pay off the myriad of credit card balances with the home equity loan and enjoy one monthly payment, typically at a reduced interest rate. The drawback to this strategy is that the loan is tied directly to the borrower’s home—if payments are not made, the lender may obtain the property. Get a FREE Home Equity Quote.
Unsecured Debt Consolidation Loans
For those who do not own property, many financial institutions offer a special unsecured loan aimed at debt consolidation. Although borrowers will have the advantage of one monthly payment, many debt consolidation loans often include fees and higher interest rates. Consider Debt Settlement.
Student Loan Consolidation
Students usually have an innumerable amount of student loans in their name by the time they graduate. One way to reduce interest rates and consolidate payments is to obtain a student debt consolidation loan through an approved Federal Family Education Loan lender. Student loan consolidations allow for only education-type related loans and are regulated for a set ceiling interest rate.
Debt Consolidation Pitfalls
Unfortunately, among the credible agencies working to help people with debt consolidation, there’s a sprinkling of companies interested in only adding to a stressed borrower’s frustration. According to MSN Money, borrowers should be leery of companies that offer “easy does it loans” where obtaining a loan is extremely simple despite poor credit.
Avoid companies that promises to handle every aspect of debt consolidation. These companies build in a fee, typically hidden, into every service they provide, leaving the borrower with sticker shock and ultimately more debt.
MSN Money also says that performing a multitude of many balance transfers in an attempt to consolidate debt may be a bad idea. Scott Kays, president of Kays Financial Advisory Corp. says that continuously transferring balances will show up and damage the borrower’s credit report. Eventually, the borrower may be turned down for a credit card and be stuck holding onto a high interest credit card.
Dunleavey, MP. “Your Three Worst Debt Consolidation Moves.” MSN Money