You may be considering a debt consolidation loan to help yourself get out of debt.
Often people will take out a home equity loan or a second mortgage as a way to consolidate their loans. This will lump the debt payments into one single payment. It may also lower the interest rate and lower your monthly payment amount (by extending the term of the loan). While you may think that consolidating your loans and making the payment more manageable is an easy way to begin to get out of debt, you need to carefully consider many things.
The Basics of Debt Consolidation
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When you consolidate your debt, you pay off the balances on your credit cards, and other loans with the money that you receive from the new loan. After you do this, you only have one payment to make instead of several. You can do this with a second mortgage or a home equity line. Some companies offer an unsecured debt consolidation loan. You need to be careful with these because the interest rate is usually very high. However, the debt consolidation loan may have a lower interest rate than many credit cards.
Saving on Interest Through Debt Conslidation
While the initial interest rate may be lower, because you are extending the length of the loan (with lower payments), you may end up paying more in interest than you would have otherwise. So you may not be saving the money that you thought you would by taking out this type of loan. Be sure that you look closely at the numbers. If you are on a debt payment plan, you need to keep working on finding to pay off your debts quickly.
Beware of Changing Unsecured Debt into Secured Debt
Generally a debt consolidation loan will take unsecured debt and change it into secured debt. If something were to happen to you and you were unable to make the payments on your home equity loan, and then you could lose your home. If you were unable to make payments on your credit cards, you credit score will go down, but you are not likely to lose your home. When you choose a consolidation loan, you should look for a set interest rate and an unsecured loan. This will protect your assets.
Debt Consolidation Does Not Always Work
Most people who take a debt consolidation loan will run their credit card balance back up within two to three years. A debt consolidation loan does not address the real problem, which is spending more than you make. If you do not address this issue, then you end up worse off than before, because you will owe twice as much money. If you do decide to take out a consolidation loan, you need to stick to your budget. An accountability partner will make it easier to stick to your budget if you must report your spending.
Alternatives to a Debt Consolidation Loan
You can take care of the situation by setting up your budget, and a debt payment plan. You can also work with your creditors to see if they can lower payments and interest rates for you. It is only through addressing the reasons that you have debt that you will be able to get out of debt and stay out of debt. If you are having trouble staying focused on getting out of debt, try rewarding your progress and finding a support team that will help you make good financial choices. If you are having a hard time solving your debts, you may consider a debt relief firm for extra help in getting control of your situation.
source : wealthforum.com