Facts To Consider Before Consolidating Debt
When you have a lot of payments due every month, it can be financially and emotionally taxing. Debt consolidation is an attempt to pay back these different debts through a single, larger loan. Debt consolidation loans allow you to repay your debts over a longer period of time at a low rate of interest. Often debt consolidation may need you to offer collateral such as a house.
Should you consider debt consolidation? You need to seriously weigh the pros and cons.
The facts in favor of debt consolidation are namely having to pay off only a single creditor and securing a fixed rate of interest. A fixed amount payable to a single entity every month leads to better management of your finances. Instead of having to pay different people, you need only pay off one creditor in the new scenario. At the same time, you have no more variable interest rates to be concerned about. What this means is that there is no unexpected demand made of you every month, because you know very well what your payment obligations are for each month.
A major drawback to debt consolidation is that you will be paying off the loan for a long time. Even though you have a low interest rate, you will end up paying far more over the long haul than you would have by paying down the initial debts.
Furthermore, the asset that you need to put up as collateral against such loans is usually a high value item such as a car or home. If you default on your payments, you could lose your house or vehicle. If this happens, you will be right back where you started minus a house or a car.
One of the biggest plus points of debt consolidation is getting tax benefits. While it is true you get no benefits from interest paid on consumer loans like credit cards, using your house as collateral on the loan may turn the debt into a mortgage. Mortgage loans qualify for tax benefits.
Another consideration involves the effect consolidation will have on your credit report. If you opt for debt consolidation, your outstanding debts will appear as a single debt on your credit report. Generally, credit ratings improve and prospects of further loans are stronger, if your report lists only a few creditors. This might not be a benefit though, because having access to credit is what landed you in your mess to begin with.
Once your payments are lower each month, and you see your credit rating going up, you might be tempted to incur more debt. This is absolutely the worst move you could make. If you were to take a new debt in such a scenario, you would suffer some unintended consequences. You would eventually get caught in a never ending cycle of interest and debt repayments, leading once again to default and ultimately foreclosure of your home.
When debt consolidation seems to be the only answer, it shows that you have made some poor decisions in life. Weigh all the options that you have with great care. Tweak your budget, reduce your spending, and increase your income as much as possible to pay off your debt responsibly. If all else fails, think carefully and analyze all that has been said and written about debt consolidation before you go ahead with it. Whatever you do, seek to be a more responsible financial steward in the future.