“Debt consolidation” almost seem like magical words because they imply rolling debt into one manageable total with an affordable payment. But is that always true? The answer is: maybe.
Debt consolidation can take one of three forms today. You can transfer account balances to credit cards with lower interest rates. Or you can take out a home equity loan and pay off other debt. In the third case you can obtain a debt consolidation loan.
In the first case, the lower interest rates offered on many credit card accounts are often introductory to lure consumers into accepting the cards. If a card has an introductory offer though, it means the rate will go up. If you transfer debt to the card because it currently has a low interest, it’s easy to see what is going to happen when the rate goes up. In addition, anyone making one late payment on a low interest card will lose their favored status and interest rates will jump up.
In the second option, taking out a home equity loan has been a popular debt consolidation practice. There can be two potential problems with this approach. First is the fact you could pay more for the debt in the end if the equity loan extends for15, 20, or 30 years like a house mortgage. Second is the fact that placing another mortgage on the house makes you more vulnerable financially. If you were to default on the equity loan, you could lose the house.
Obtaining a debt consolidation loan is the third common approach consumers take. A debt consolidation loan can turn multiple monthly debt payments into a single monthly payment. Before taking this step though, it’s important to do the math. You need to verify that the loan is not charging a higher interest rate then the rate you would be paying for the individual debts.
Like the home equity loan, your consolidated loan should not lead you to pay thousands more for a longer period of time on your current debts.
The magic in debt consolidation is only apparent when the new loan makes your debt more manageable and helps you pay off current debts faster. Absent these conditions, you might as well keep the individual debt payments even if it is more inconvenient to make multiple monthly debt payments.
If the three debt consolidation options are not financially feasible then there is a fourth option. The fourth option is not debt consolidation. It is debt management. Consumers having trouble making progress on debt pay down can contact a debt counselor. There are two reputable organizations that can provide consumers with the names of reputable consolidation services. They are the National Foundation for Credit Counseling and the Consumer Credit Counseling Agencies.
Debt consolidation can help consumers in some situations, but it’s important to clearly understand the numbers. Rushing into debt consolidation without understanding the long term financial consequences can lead to a consumer being in debt for a longer period of time and paying more in interest charges.
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Tags: Debt, Debt Consolidation
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