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Monday, April 16, 2012

Considering Debt Consolidation : Is it right for you?

If you are having difficulty paying back your student loans or credit cards or simply looking to free up a little extra cash that is usually tied up in the repayment of different loans or debts, you may wish to consider debt consolidation. Debt consolidation is the process of combining similar debt into one large loan in order to make the debt easier to repay. However, before making the decision as to whether debt consolidation is right for you, you should first consider what the benefits and drawbacks are to this form of debt management.

Considering Debt Consolidation : Is it right for you?

The benefits to debt consolidation are fairly straightforward. By combining all of your smaller loans into a larger loan, your monthly payment will generally be smaller than before. This can free up a little extra cash in a monthly budget that may be extremely tight. Similarly, the interest rate on a consolidation loan is normally less than the rates that you were paying on your credit cards or loans. Again, lower interest translates to more money saved at the end of the month. Another benefit of debt consolidation is the ease of payment to just one loan company rather than multiple ones during different times of the month. Submitting payment on your debt is significantly more simple and easier to remember. The ease of payment is also helpful for avoiding late fees that may be charged when you forget to make one of your many monthly payments on time.

Considering Debt Consolidation : Is it right for you?
While debt consolidation may seem like a win-win situation, there are a few downfalls to the process that are also worth mentioning. The first is the length of time you may be paying of a debt consolidation loan. Generally, when you are consolidating debt down into a smaller payment with a lower interest rate you are also obtaining a loan with a longer repayment period. This means that you will be paying off the new consolidated loan longer than you would most likely have been paying off the original debt. Similarly, for consolidated loans that have greater repayment periods, it is important to understand that the prolonged period of repayment may mean that you are actually paying more interest in the long run then you would have had you left the loans or debts un-consolidated even though the monthly payments are less. Finally, if you choose to use a home equity loan as a means of debt consolidation (using the money from the equity loan to pay off other debts so only the equity loan remains) you may be risking your home. This is because a home equity loan is a secured loan based on a lien the bank places on your home. If you fail to make payment on the home equity loan, the bank or other lending institution with the lien on your home can foreclose on your home and sell it to mitigate their damages. As such, debt consolidation in the form of a home equity loan is especially dangerous to individuals whose income fluctuates, has difficulty managing their finances, or regularly forgets to make monthly payments on time.

1 comment:

  1. While debt consolidation can be a viable alternative to high interest payments, it can also cause additional problems. This is especially obvious with credit cards when cardholders turn around and use the cards again after getting a loan to pay them off.