Debt
Consolidation Loans – Pro's And Con's
Many people suffering
from deep debt obligations often look towards debt consolidation loans as the answer
to their problems. Sometimes the debt is so painful, they don't always look at
both the pros and cons of this debt solution though, so we'll take a brief
look here.
First though, what is debt
consolidation? Simply put, it's the process of combining all your debts
into one. If you have ten debts of $10,000 each, then you have a total debt of
$100,000. Some of those debts however, might be generating an additional 10%
interest, while others are generating 15%-20% interest. In other words: Some
of your debt is more expensive than others.
This is where debt consolidation
comes into play. In theory, you'd take out a loan for $100,000 at a reasonable
- or hopefully low - interest rate. Then you'd use those funds to pay off all
ten of the smaller debts. This leaves you with just one payment to make each
month, and one interest rate to manage.
Consolidating debt can
be done with debt consolidation loans, by transferring your debt to zero or
low interest credit cards, and by taking out a home equity loan.
Using the equity of your
home to pay off debts can be risky, because if you default on the new loan,
you could lose your home.
Likewise, using zero
interest credit cards could also be problematic in the future, because these
offers are usually designed to lure you in. The zero interest doesn't last.
Debt
consolidation loans might be helpful, but be aware that when you have debt
problems to begin with, you might not qualify for low enough interest rates.
So if you choose to go this route, be sure to do all the math: Figure out
whether the consolidation loan actually will reduce your overall payments -
including the total interest you'll be paying for the life of your loan.
Some credit and debt
counselors feel debt consolidation of any kind is a bad move to make though.
In fact, it's estimated that 70% of Americans who take out some sort of loan
to consolidate their debt end up with the same or worse debt problems within
two years.
A better, more long-term
solution might be to consider using a debt
counselor. Professional counselors negotiate with your creditors to lower
your payments or interest rates, while at the same time coaching you to manage
debt more effectively. The unfortunate side effect of using counselors though;
your credit report will take a hit because you're not technically paying your
bills as originally agreed.
So there you have a
general overview of debt consolidation, the common solutions and options,
along with pros and cons of each. Be sure to research all your options
completely before making a decision of course, because you don't want to make
your debt problems worse in the long run.
Article Source:
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