Debt consolidation loans - Good or bad for you?
When dealing with debt, stay calm and try to focus on the positives. If you are digging yourself into a hole, month after month, the simple solution is to stop digging. The real estate market in most places throughout the Country has created equity in peoples’ homes. Looser lending practices has also made it easier to borrow as much as 10% more that what your home is worth. But is consolidating all of your debt into one monthly payment the answer? Here are some things to look at when considering a debt consolidation loan:
Simply put, debt consolidation is when you combine all of your outstanding debts (usually credit card bills, medical bills, maybe your auto as well) and obtain a new loan that covers all of them into one bill.
You could in theory, take a low interest rate credit card and roll over the other credit card balances with higher interest rates onto that card and consolidate that way. Most credit card companies offer 0% interest for the first 6 months, etc. Make sure you read and understand all the terms and conditions ahead of time. If you miss a payment your interest rate can go upwards of 20% interest, or after the 6 months has expired, an interest rate of 18% or more may apply.
Traditionally, debt consolidation loans are usually obtained by tapping into your homes equity to consolidate your bills. Here are the benefits:
* Most often, you will have a smaller monthly payment (the payments are usually spread over a period of 5 – 30 yrs. depending on the loan so, that is one reason why the payments are lower)
* Home interest rates are lower than traditional unsecured credit cards so, you get the benefit of that lower interest rate.
* You may get a tax benefit from the loan. You don’t get any tax benefit paying your unsecured credit card bills each month.
That all sounds pretty good. I get a tax break. My monthly payments and interest rates are lower. Why shouldn’t I do it?
Here is the downside:
* You have now exchanged unsecured debt for secured debt. Here is what I mean. When you obtain a consolidation loan, you are putting up your house as collateral. If you don’t make the scheduled payments (let’s say that you become ill or lose a job) you can potentially lose your house.
Your existing credit card debt is unsecured. If you default on the payments, your credit card company that you owe the debt to would have to sue you in order to try and recover any monies owed. If you default on your debt consolidation loan, the lender can start foreclosure proceedings and try to take your house and sell it at auction, to get the money they are owed.
* If the real estate market changes and property values decline, you may find yourself owing more than what your home is worth. This can effect your ability to sell your house or obtain a lower interest rate if you should decide to refinance the property again (let’s say that the loan is adjustable after 5 years, when that happens and your payments go up and you can’t afford to make those payments, what will you do?)
* Sadly, the average person that takes out a debt consolidation loan usually goes back and uses the same credit cards again and creates the cycle all over again, this time in deeper debt with fewer options. If you do consolidate, tear up your old credit cards. Keep 1 to 2 for emergencies, etc. but cut up the rest. I wouldn’t say to simply cancel all the others because old established credit can help your credit score/rating but don’t use them. If you are going to cancel any of the cards, cancel the youngest ones first and keep the older ones (provided you have had a good payment history and interest rates with them).
To learn more about your options and managing you debt, log onto www.debtreliefoptions.com.
Jon Noble
Staff writer
Debt Relief Options
asktheexperts@debtreliefoptions.com
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