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Debt consolidation - Some things to ponder
If you have too much debt, you might be all ready to jump into a debt consolidation loan. That can often be a good idea, but you have to know what you are getting into. There are four things you need to consider before making the decision to consolidate your debt. If you fail to think these things through, your bad situation could be come ever worse.
Read on.
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Debt consolidation requires you to plan ahead
If you are like many Americans, you owe too much money on your credit cards. That isn’t all that remarkable; most people owe too much money on their credit cards. In fact, most people have too many credit cards to begin with. If you owe money on a number of different accounts, it can be costly and time consuming to write out checks to each and every one of them once a month. With the interest and the hefty minimum payments, you are spending a great deal, if not all, of your disposable income just paying your credit card bills.
A frequently advertised solution to this problem is debt consolidation, where you take out a new loan in the amount of the sum of all the other ones. You get a lower interest rate and one single payment that may be smaller than the sum of the previous payments. That’s a great idea, but there are four things you should consider before signing up for a debt consolidation loan.
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- Interest rates - Credit card loans have high interest rates; rates of 20% are not uncommon. Ideally, you want to lower your rate, as that will decrease the amount you pay each month and the total amount you repay overall. Shop around; you want to get the lowest possible interest rate. You want to make sure that the interest rate is fixed, if you can, so that it does not adjust upward later.
- Length of the loan - Debt consolidation companies often tout low payments without pointing out that the loans they offer may dramatically increase the length of time you are paying back your debt. If you replace five years worth of payments with a twenty five year loan, you might have lower payments while paying back a whole lot more money. You need to take the length of the loan into consideration before agreeing to consolidate debt.
- Keep your payments in check - Often, home equity loans are used for debt reduction. Keep in mind that if you borrow against your home, you are putting your house at risk if you do not pay. Make sure that you don’t take out more loan than you can repay.
- Exercise caution - Once you combine your debts into a single loan, your credit card balances will be completely paid off. That means that you might have the temptation to resort to your old spending habits. Keep in mind that combining loans doesn’t make your obligations go away; they are simply moved elsewhere. If you start spending recklessly again, you could find yourself in worse trouble than ever.
Taking out a new loan to repay several old ones can be a great tool for getting out of financial trouble. The savvy debtor will be aware that a number of factors go into repaying debts in the most efficient manner possible. Shop around before settling for a loan company, and try to find one that has your best interests in mind, rather than their own bottom line.
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