Why Debt Consolidation?
People consolidate debt to reduce their monthly payments. With consolidated loans, financial institutions such as banks and credit unions pay off all consumer loans and replace them with a single “consolidated” loan of all combined debt, usually with a lower fixed interest rate. Consumers can use consolidated loans to pay off debts on cars, credit cards, student loans, medical bills, etc.
If you cannot meet your minimum monthly payment, if your loan or loan still has many lives left, or if you can get a lower, fixed interest rate, then it might be worth consolidating. But there are a few questions you need to ask yourself: Are you willing to extend the life of your loan in return for lower payments? This is usually how financial organizations can offer consolidated loans at lower rates.
Are you ready for a new 20 or 30 year commitment? And most importantly, are you aware that when you consolidate your debt and extend the payment term, while reducing your monthly payments, it will actually increase the total dollar amount of interest you will pay in the long run? You have to pay off your loan? It may be more problematic than its value, and far more expensive, to be consolidated to a lower rate if you only have a few years of payment under an existing loan. One of the most common ways to consolidate loans is to use equity in your home. This can be risky as a business because it is comfortable. To consolidate this method, you will convert unsecured debt to safe debt. You now have more to lose than before if you have to default on your new consolidation loan. At least with your current loan, the items you bought on your credit card are not taken from you. But with a consolidated home equity creditor, you will not hesitate to take your home if you fail to make your payment.
Another type of consolidation loan to look out for is a consolidation loan that offers an amazingly cheap interest rate even though your credit is bad. Catches with this type of consolidated loan are very high application fees. If you are able to pay the application fee, you are better off applying the same amount to pay off your debt. Plus, there are so many wolves in sheep’s clothing that offer this type of consolidation transaction, you may never actually see your consolidation loan when everything is said and done. With that warning in mind, you might still want to consolidate debt, and do it sooner than later. For one, the opportunity to consolidate debt may not exist for a long time. Both the congress and the President are considering a law that can convert consolidated loans with fixed interest to loans with variable interest rates, or completely eliminate consolidated loans.
If you choose not to consolidate your loan, or cannot for any reason do consolidation, you can also consider having payments automatically deducted from your bank account on a regular basis. While it doesn’t reduce your expenses like a consolidated loan, it ensures that your payments are made on time, and it will help you improve your credit score.