Debt Consolidation NEWS

Dangers of Debt Consolidation

Published by admin on December 10, 2009

Currently, there are the lowest interest rates in decades, and this means that it can be tempting to take advantage of them, so you can consolidate higher-interest loands into one loan that is both easier to handle and cheaper for you. Paying a dozen different creditors at different rates and at different times of the month can be confusing and a single debt could help you organize your personal finances better.

Nevertheless, you need to understand that there may be some traps, especially if you do not pay enough attention to the contract you are signing.

First of all, using debt consolidation might not mean necessarily lower interest rates. Such interest rates are available for people with relatively good credit scores, and if you already have some debt trouble, it’s less likely that you can get a much better deal. It all depends on what kinds of deals you currently have for your loans. If you have credit card loans with huge interest rates, it’s quite likely that you can negotiate a better deal. In any case, you should always look for a smaller interest rate, as it makes no sense to consolidate your debt into a single high-interest rate loan.

The length of the repayment period is also important: even if you get a lower interest rate, you could pay for a longer period, and this way, you’ll end up paying even more in total. The best way to choose your the monthly payment after debt consolidation is to calculate for yourself a monthly budget and based on this budget and your incomes, you should see how much you can pay. It’s best if you try to get rid of debt as fast as you can, as the income will accumulate and it will take longer and longer to pay it off, before you can enjoy a debt-free life.

Taking a home equity loan or line of credit can be a quick solution to get out of debt. The main advantages of this solution is that, as a secured debt, you will get a very low interest rate, much lower than the unsecured credit card debts you may currently have. But there’s a danger about this: you could lose your home if you default on this loan. Hardships may happen and you should think whether the risk of losing your home is really worth it. Nevertheless, there are some advantages, such as the tax-deductability of equity loan interest.

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