You are
swimming in debt. You have 4 credit
cards maxed out, a car loan, a consumer loan, and a
house payment. Simply making the minimum payments is
causing your distress and certainly not getting you
out of debt. What should you do?
Some people
feel that debt consolidation loans are the
best option. A debt consolidation loan is one
loan which pays off many other loans or lines of
credit.
I’m sure
you’ve seen the advertisements of smiling people
who have chosen to take a consolidation loan. They
seem to have had the weight of the world lifted off
their shoulders. But are debt consolidation loans a
good deal? Let’s explore the pros and cons of
this type of debt solution.
Pros
1. One
payment versus many payments: The average
citizen of the USA pays 11 different creditors every
month. Making one single payment is much easier than
figuring out who should get paid how much and when.
This makes managing your finances much easier.
2. Reduced
interest rates: Since the most common type of
debt consolidation loan is the home equity loan, also
called a second mortgage, the interest rates will be
lower than most consumer debt interest rates. Your
mortgage is a secured debt. This means that they have
something they can take from you if you do not make
your payment. Credit cards are unsecured loans. They
have nothing except your word and your history. Since
this is the case, unsecured loans typically have
higher interest rates.
3. Lower
monthly payments: Since the interest rate is
lower and because you have one payment vs many, the
amount you have to pay per month is typically
decreased significantly.
4. Only one
creditor: With a consolidated loan, you only
have one creditor to deal with. If there are any
problems or issues, you will only have to make one
call instead of several. Once again, this simply
makes controlling your finances much easier.
5. Tax
Breaks: Interest paid to a credit card is money
down the drain. Interest paid to a mortgage can be
used as a tax write-off.
Sounds great,
doesn’t it? Before you run out and get a loan,
let’s look at the other side of the picture
– the cons.
Cons
1. Easy to get
into further debt: With an easier load to bear and
more money left over at the end of the month, it
might be easy to start using your credit cards again
or continuing spending habits that got you into such
credit card debt in the first place.
2. Longer time
to pay off: Most mortgages are the 10 to 30 year
variety. This means that rather than spend a couple
of years getting out of credit card debt, you will be
spending the length of your mortgage getting out of
debt.
3. Spend more
over the long haul: Even though the interest rate is
less, if you take the loan out over a 30 year period,
you may end up spending more than you would have if
you had kept each individual loan.
4. You can lose
everything: Consolidation loans are secured loans. If
you didn’t pay an unsecured credit card loan, it
would give you a bad rating but your home would still
be secure. If you do not pay a secured loan, they
will take away whatever secured the loan. In most
cases, this is your home.
As you
can see, consolidated loans are not for everyone.
Before you make a decision, you must realistically
look at the pros and cons to determine if this is the
right decision for you.
________________
About the Author
Wesley Atkins is the owner of http://www.credit-cards-advisor.com- which aims to get you fitted with the
best credit cards to suit your situation. With
numerous credit card articles and easy online credit
card applications you will never choose the wrong
credit card again.
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