A debt consolidation loan can be a real lifesaver if chosen carefully and properly managed. We’ve all seen the barrage of television commercials and heard the radio ads on this type of loan but not everyone can be helped by debt consolidation.
If you are considering debt consolidation you’ll need to decide if this type of loan is truly beneficial for you. It is not simply a loan your obtain to pay off your debts. Debt consolidation loans are generally secured loans, meaning you must have collateral-something the lender can take from you if you renege on the loan.
Usually, this is your house or other marketable property that you own. Your consolidation loan will be a second mortgage on your property so essentially, you’re betting your home that you’ll be able to pay off the loan.
If you have good credit and a decent amount of equity in your house, you can most likely get a good rate of interest on a consolidation loan. Some lenders will offer interest rates comparable to first mortgage rates to borrowers with good credit.
However, if your credit has suffered because of the debt you’re trying to pay off it’s quite a different story. With less than stellar credit the interest rates could soar as high as eighteen percent!
A debt consolidation loan isn’t always the answer to financial difficulties. Some consumers take on too much debt trying to live beyond their means. Consolidating their debt won’t solve their problems; indeed, a consolidation loan could actually make their financial woes worse!
Without adjusting their spending habits to a realistic level, those consumers will pay off their debt and keep accumulating more. But the next time they’re in an untenable financial position, they’ll have nothing left as collateral with which to dig themselves out-and they’re still paying off their consolidation loan! Along with a debt consolidation loan, major lifestyle and attitude changes are usually in order to avoid falling deeply into debt once more.
The good news about a debt consolidation loan is instead of receiving many large bills each month you’ll have one bill that will likely be a substantially lower. Your debts will be paid, your credit will improve and your budget will once again be manageable. The taxes you pay on your home equity/consolidation loan are tax deductible.
If you don’t own a house but need to consolidate your debt you may be wondering if there are any other options. The answer to this problem may be a zero-percent credit card. These cards are usually offered as teasers to get you to switch credit card companies.
You can use the card to pay off your debts and then begin making one monthly payment to your new card. The zero-percent rate usually has a time limit, after which the rate begins to climb. Be sure you know the rate schedule before you opt for a zero percent credit card!
The low rates of the zero-percent credit cards is only good as long as you continue making your payments on time. If you’re late just one time the company will jack up their interest rates! You must also be aware of hidden charges that can increase your costs.
It is important that you read all of the fine print and know all of the rules of the company that is extending you the credit. Zero-percent cards can truly help some people but certainly aren’t the solution for everyone. Again, it can depend on whether you can determine why the debt piled up and avoid repeating that scenario.
As always, carefully and thoroughly read any contract that you sign. If you have questions, ask them and be sure that you understand exactly what the terms of the loan are. Most consolidation loans don’t include prepayment penalties but it’s best to be sure that yours doesn’t carry one. If your lender or credit card issuer is reluctant to answer your questions or exhibits impatience, you should consider finding another source to consolidate your debts.
Joe Kenny writes for Rebuild.org, offering debt consolidation loans, or for UK residents, consolidate debt help now. Visit today for more Debt relief options from Rebuild.org
