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Debt consolidation is not a one-size-fits-all solution to your debt problems. While some people may benefit from a well-chosen debt consolidation loan, all consumers need to be aware of the risks these loans pose before taking on more debt. If you need financial help, talk to a financial adviser or credit counselor before you commit to a debt consolidation loan.

Positive: Lower Monthly Payments

With a debt consolidation loan, you get a loan from a lender and use the loaned money to pay back other loans you have. Debt consolidation loans usually, but not always, allow you to pay a lower monthly payment because the life of the loan is longer than your current loans.

This means that even though the consolidation loan is for the same amount of money as your other loans, you pay less each month because the loan repayment period is spread out over a longer time.

Positive: Fewer Monthly Bills

When you consolidate your loans, you take several loans and transfer that debt to a new lender. This reduces the number of bills you have to pay each month.

If, for example, you have five monthly credit card payments and take out a home equity consolidation loan, you no longer have to pay each credit card bill every month, merely the single consolidation loan. However, if you continue to use the credit cards, you’ll soon have to pay those bills as well as the consolidation loan.

Negative: Higher Debt Costs

If debt consolidation loan companies allow you to pay less money each month, many people wonder how these lenders make money. They make money by extending the loan repayment term and, sometimes, by charging you higher interest than your current loans.

Even if you pay less each month, you end up paying more money in the long term because you’re paying interest for a longer amount of time. If you also have a higher interest rate on the consolidation loan, you could end up paying a lot more money than your original loans.

Negative: No Change In Habits

If your problems is that you too easily rack up debt, such as by charging too much on your credit cards and only paying back the minimum payment every month, debt consolidation can lead to even more problems.

When you take a debt consolidation loan, you don’t eliminate any debt. While the loan may allow you some financial breathing room, you still have to pay back the loan. You can’t learn to get out of debt once you learn to stop taking on more debt than you can afford, and debt consolidation loans don’t teach you how to do this.

Debt consolidation can help consumers get their monthly obligations under control by combining monthly payments from several into one. As convenient as debt consolidation can sound, if you do not have a consolidation plan then you can experience debt consolidation problems. Learn to identify the potential challenges with debt consolidation so that you can avoid them.

Real Deal

When you are putting together a debt consolidation program on your own or with the assistance of a consolidation professional, you need to review the plan to ensure that it is the right one for you. Consolidating several payments into one is only a single aspect of debt consolidation.

For debt consolidation to be effective, it must also help lower your monthly payments. Compare the full cost of the consolidation agreement, including interest rate and service charges, to see if the agreement is saving you any money.

Spending Again

Debt consolidation does not abolish your high interest credit card debt. It moves your debt from several accounts down to one account. The problem with that is the remaining credit accounts are now completely paid off, but still active. The desire to spend, or the feeling that you now have a whole new set of credit accounts to use, will increase your debt if you run up the balances on your cards again.

Reading the Fine Print

One of the ways that people consolidate debt is to move all of their credit card debt into a single credit account. In most cases, this new account was an offer received in the mail that advertised a zero percent interest rate on transferred balances, according to Jenny McCune, writing on the Bankrate website. Read the rest of this entry »

Many consumers are considering debt consolidation to help lower their bill payments in today’s unstable environment. Whether this is a wise decision depends on the circumstances, the types of debt one is looking to consolidate and what interest rate is offered. It is also important to learn helpful advice on avoiding predatory lenders.

Identification

Debt consolidation is the practice of taking out a large loan to pay off many other loans, usually with higher interest rates. This is very common practice when one has multiple high-interest credit cards and is having a hard time making the minimum monthly payment on each.

Debt consolidation companies work with lenders to negotiate a payoff amount and interest rate so consumers will have one low, monthly payment. There are pros and cons to debt consolidation, and it is wise to look closely at the process and decide if it is the best course of action depending on the circumstances.

Features

Some debt consolidation loans are in the form of an unsecured loan, but most often the new loan is secured against collateral, usually a home. Because of the collateral, the lender’s risk is reduced, therefore allowing a lower interest rate for the debtor.

What this means is that if the debtor defaults on the new loan, his home will be foreclosed on and sold to pay back the loan. In the case of an unsecured debt consolidation loan, the lender will negotiate to lower the interest rates and payback amount with each creditor, but often this rate will not be as low as with a secured loan.

Benefits

Debt consolidation offers the greatest benefit to those paying back credit card debt as opposed to other types of loans. The reason for this is that the interest rates on credit cards are normally much higher than even an unsecured loan.

For debtors that have collateral such as a car or a home, then a secured loan’s interest will be even lower, allowing the debt to be paid off sooner, incurring much less interest. In the meantime, payments are being made on time to each creditor, avoiding delinquency or improving the debtor’s credit score if he is already behind.

With consolidating lower interest loans, the benefits are not as great, for the interest rate on the debt consolidation loan may not be much lower and it may actually stretch out the life of the loans. The debtor may end up paying more by the end of the loan than if he had managed his loans and paid them off on his own.

Effects

The effects of debt consolidation are a concern for many. Interest rates and payment amounts need to be carefully analyzed to be sure that the amount paid back is not, in fact, more than if the loans had not been consolidated. Others may be concerned with how consolidating debt will affect their credit.

In most cases, credit score will not be affected much one way or the other. However, it can sometimes take months to have a debt consolidation application approved by debtors and accounts can go unpaid for that time, thus showing up as delinquency on a credit report. Read the rest of this entry »