Because of unforeseen circumstances or mismanagement, many consumers quickly get into financial trouble. Too many creditors and credit cards with high balances can put a crimp on getting any additional new credit. Debt can quickly spin out of control and cause you immense stress. If you are in a tight spot financially and strapped with high interest rate credit cards and more monthly payments than you can handle, you might find relief with a debt consolidation loan. Debt consolidation is borrowing money to pay off money borrowed.
What Can Debt Consolidation Help?
With a debt consolidation you payoff most or all other unsecured loans, and owe the money to another creditor under new terms. These terms can be lower monthly payments for a longer period of time, and overall better interest rate. However debt consolidation does not lower your debt or fix the issues that got you in trouble originally.
This is really most often no more than a temporary band aid. Debt consolidation loans lower monthly debt payments by either a longer debt term (length of loan) or lower interest rate. You could negotiate a balloon payment due at a later date or longer term amortization to achieve lower monthly payments.
Consolidating Debt With a Second Mortgage
Many people seek the equity in their home with a second mortgage, home equity line of credit, or by refinancing to payoff credit card debt. While this can sometimes be a better interest rate, longer amortization, and have a tax advantage, if you fall behind in these payments you risk losing your home. In addition you could be stuck in your home for awhile unless you are willing to come up with money to unload it if you end up in an upside down situation where you owe more than your home is worth.
You could get a second mortgage, home equity line of credit, or refinance if you own a home and use the money to consolidate your debt. If you miss payments on a loan secured by your home though you could end up in foreclosure. Also real estate market values ebb and flow and your home might not appreciate and even depreciate. If you decide to move and sell your home you could find you have no equity or owe more than your property is worth.
Other Debt Consolidation Advantages
Once you have a single payment each month you will find managing your money gets simpler. You will be less likely to make a late payment or miss one altogether. In order to benefit you a debt consolidation loan ought to have a lower interest rate than your credit card or debt. You must negotiate a loan that reduces your monthly bill amounts. When you obtain a consolidation loan stop applying for credit and using credit cards. This is your opportunity to get out of debt once and for all.
When Is Debt Consolidation Not a Wise Choice?
Debt consolidation is not the best solution for everybody in over their head. If your payments or interest rates are already low, you have few creditors, than a debt consolidation loan might not give you any advantage.
In order to be favorable you need to end up with a lower total interest liability and monthly payments than your current situation. Compute the total liability of your consolidation loan and weigh this against your debt now. In some cases consolidating your debt can improve your credit eventually. This is due to the fact that your debts all get paid off.
Avoid a Bad Credit Debt Consolidation Loan
If you have already been missing or making late payments you might have a difficult time getting good terms for a consolidation loan. Avoid bad credit debt consolidation loans because the interest rates will be high and could send you down a path to bankruptcy. Your goal is to reduce your interest rate and monthly payments. Borrowing money to solve money borrowing problems does not address the cause of your problem.
Consider taking a money management course or credit counseling and do not borrow any more money or open any new credit accounts. Most people in credit trouble do not know how to manage their money. A course or financial consultant can help you establish a budget and repayment plan.