Debt ConsolidationDebt consolidation is an option that has potential for being beneficial depending on your unique set of financial details and whether you can qualify for it. It involves taking a single loan out in order to pay off several other loans. Some people do it because the interest rate of the consolidated loan is less than the interest rates of the loans that the consolidated loan is replacing. Others do it because they can change some variable interest rates into a fixed interest rate and still others choose a consolidated loan because they just have to write out one check at the beginning of the month rather than five or more checks.
Sometimes the consolidated loan is unsecured in the same way as the unsecured loans they are replacing. More often, however, the consolidated loan is a secured loan and you're lending with your house (usually) as collateral. This can, of course, be risky because if you default on the consolidated loan, you could lose your house. You have to agree to foreclosure of your house as part of what could happen if you can't pay back the loan and you're using the equity in your home as a way to make the high interest loans and credit cards go away.
You do all of this money-changing through a debt consolidation company that can usually get away with discounting the amount of the loan. Some debt consolidators will pass some of this savings onto you while others won't. If you're thinking of doing this, you need to do some shopping for a debt consolidation that will help you out in the end. You also should know that debt consolidation can adversely affect your ability to discharge your debts if you still must file for bankruptcy. Don't do a debt consolidation if you're thinking of undergoing a bankruptcy any time soon.
You can get a debt consolidation loan from a bank if you have the credit to do so. It would be an unsecured loan that would involve a lower interest rate than credit card rates and a single payment per month. You can also take out your consolidation loan from a debt consolidation company. If you're "refinancing your house" or using some of its equity for consolidating your loans, you work with a mortgage company. In order to get a loan, the lender will want to know your precise monthly budget in order to make sure you are capable of paying back your consolidated loan. If you're doing a secured loan, the lender will want to see your automobile title or mortgage information to make sure you own the property you're holding up for collateral. An income statement is also necessary to make sure you make enough money to handle this type of loan.
Many consolidation agreements offer a significantly lower interest rate for the first few months in order to make it worth your while to contract with them. Some offer even further "discounts" depending on the amount of debt you are trying to consolidate among other factors. However, the introductory interest rate usually doesn't last for long and they will probably steadily increase your interest rate over time so if you think it may take you a long time to pay off the debt, it would be a mistake to go this route for the most part.
There are some things about a debt consolidation loan that might not be in your best interests. Let's take a look:
Debt consolidation loan companies often charge you high fees before you even get your loan. Ask how much you'll need to pay up front and make sure to total those fees in the total amount you'll have to pay back. Interest rates for a secured loan should be less than that for an unsecured loan but you need to check on the actual interest rate charged. It might not be as good a deal as you thought it would be. Sometimes the interest rate is lower but the time to repay the loan is slower, too. This means that, at the end of the payment period, you could wind up paying more money for the consolidated loan than you would have paid had you paid the rest of your loans separately.
Some consolidation loans, especially those you can't keep up the payments on, will reflect badly on your credit score. See how a consolidated loan will affect your ability to get new credit in the future. If, in spite of everything, you really feel you would benefit from a consolidation loan, remember these things:
- You must be very realistic about the amount of total debt you have.
- Create a monthly budget that includes your total income and has room for emergency situations.
- Know how much money you should actually borrow to repay your other loans.