You are swimming in debt. You have 4 credit cards
maxed out, a car loan, a consumer loan, and a house payment. Simply
making the minimum payments is causing your distress and certainly
not getting you out of debt. What should you do?
Some people feel that debt consolidation loans
are the best option. A debt consolidation loans is one loan which
pays off many other loans or lines of credit.
I’m sure you’ve seen the advertisements
of smiling people who have chosen to take a consolidation loan.
They seem to have had the weight of the world lifted off their
shoulders. But are debt consolidation loans a good deal? Let’s
explore the pros and cons of this type of debt solution.
Pros 1. One payment versus many payments: The average citizen
of the USA pays 11 different creditors every month. Making one
single payment is much easier than figuring out who should get
paid how much and when. This makes managing your finances much
easier.
2. Reduced interest rates: Since the most common
type of debt consolidation loan is the home equity loan, also
called a second mortgage, the interest rates will be lower than
most consumer debt interest rates. Your mortgage is a secured
debt. This means that they have something they can take from you
if you do not make your payment. Credit cards are unsecured loans.
They have nothing except your word and your history. Since this
is the case, unsecured loans typically have higher interest rates.
3. Lower monthly payments: Since the interest
rate is lower and because you have one payment vs many, the amount
you have to pay per month is typically decreased significantly.
4. Only one creditor: With a consolidated loan,
you only have one creditor to deal with. If there are any problems
or issues, you will only have to make one call instead of several.
Once again, this simply makes controlling your finances much easier.
5. Tax Breaks: Interest paid to a credit card
is money down the drain. Interest paid to a mortgage can be used
as a tax write-off.
Sounds great, doesn’t it? Before you run
out and get a loan, let’s look at the other side of the
picture – the cons.
Cons 1. Easy to get into further debt: With an easier load
to bear and more money left over at the end of the month, it might
be easy to start using your credit cards again or continuing spending
habits that got you into such credit card debt in the first place.
2. Longer time to pay off: Most mortgages are
the 10 to 30 year variety. This means that rather than spend a
couple of years getting out of credit card debt, you will be spending
the length of your mortgage getting out of debt.
3. Spend more over the long haul: Even though
the interest rate is less, if you take the loan out over a 30
year period, you may end up spending more than you would have
if you had kept each individual loan.
4. You can lose everything: Consolidation loans
are secured loans. If you didn’t pay an unsecured credit
card loan, it would give you a bad rating but your home would
still be secure. If you do not pay a secured loan, they will take
away whatever secured the loan. In most cases, this is your home.
As you can see, consolidated loans are not for
everyone. Before you make a decision, you must realistically look
at the pros and cons to determine if this is the right decision
for you.
