That’s where getting a debt consolidation loan can sound like a good idea It gives you the opportunity to get all your debts figured out and paid off and only have one loan to worry about from that moment on. Yet, one still has to ask if getting a debt consolidation loan is the smart thing to do. Let’s look at the pros and cons.

One pro is that often the interest rate on a debt consolidation loan is far less than the interest you might be paying on some of your outstanding bills, especially credit cards. If you can get a bank loan sometimes the rate is between 6 and 10%, which is easily lower than a 19.8% credit card rate.

Another pro is that it’s easier only making one payments instead of multiple payments. You’ll either get one bill or have a ticket where you can make a monthly payment, and it will always be the same amount. Doing it this way also helps you pay your debt off quicker.

Of course there are downsides to everything, and in this case the downsides need to be seriously considered. For instance, it’s possible that wherever you get your loan they’ll request an automatic withdrawal from your bank account. That’s not the worst thing in the world, but many people have to try to learn discipline in making sure that money is in their bank accounts at the time, and that’s a hard lesson to learn.

Another bad thing concerns that discipline thing again, this time the discipline in not to continue using those credit cards. It’s hard for some people to look at a paid off credit card and just put it away when there’s so much good stuff out there. It doesn’t do any good to continue adding more debt while trying to pay it down.

Whatever course you decide, be ready to make some serious changes in your life. Debt consolidation loans could be just what you need, or it could be the beginning of even more problems.

Any time you can get your debt into a lower interest rate, it’s a good thing. Although you don’t see as many cards these days with 0% interest rates for six months, it does still happen, as well as lower interest rates under 10%.

The benefit of transferring debt to a lower interest rate card is that the amount of overall debt you owe will go up at a much reduced rate. If you have the capability of paying more on your credit card than the minimum, you could reduce your debt load much faster. If your debt is high you’re probably not going to pay it off, but you end up in a much better debt position overall.

Of course, if it were all so simple everyone would be doing it, and there are a lot of people who are doing it. What often happens is that people transfer to a lower interest rate card and also end up with smaller payments up front. That’s so enticing that people will feel they’ve gotten a second bonanza and only pay the minimum amount, using the extra cash for other things instead of paying down debt. The credit card companies are counting on this because they want to build your debt up as much as possible.

Something else that people don’t pay attention to is what the interest rate will be after those six months, and some of the terms that come along with it. At least the federal government has put regulations into place that says these companies can’t jack up the interest rate on the outstanding balance… at least immediately. If you’re behind on your payment just once, even by a day, they then have the right to jack up the interest on everything, and these days the going rate is 30%.

To make this type of thing work, it takes discipline, and if you don’t have it then you could end up in a worse position than you initially were. You need to have a plan, and that plan has to include:

1. A faster way to pay down a big portion of your balance.

2. A way to pay down other debt so it doesn’t grow while you’re concentrating on this one.

3. A budget to stay on track with your spending.

4. Realizing that without changes, you’ll be in the same boat, only worse, in due time.

Just these 4 things can help you go a long way; unfortunately, they’re not easy for everyone to do.

Photo Credit: www.prlog.org

Debt consolidation is the process of obtaining one loan to pay off many others. Most often consumers do this to secure a lower interest rate, to secure a fixed rate on their debt or for the convenience of having to pay only one loan.

Debt consolidation can entail converting many unsecured loans into one secured loan. More commonly consolidating debt involves one secured loan against some type of asset that serves as collateral, such as a home mortgage or savings. Using the home mortgage as collateral often secures a lower interest rate, but also allows the forced sale of the home to pay back the loan. The lenders risk is minimized; therefore the interest rate is often lower.

Debt consolidation companies can reduce the loan amount. The loan is bought at a discount when the debtor is in danger of bankruptcy. Debt consolidation can affect the debtor’s ability to unload debts in bankruptcy; the determination on whether or not to consolidate must be thoroughly thought through and weighed carefully.

Theoretically, debt consolidation is most often recommended for those paying large amounts of credit card debt. Because of the larger interest rate often carried by credit cards, often the larger unsecured loans from a bank, acquiring a secured loan using property as collateral to obtain a lower interest rate is often advisable. The total cash and interest paid towards the debt is lower allowing the amount to be paid sooner.

The advantages that debt consolidation offers debtors with high interest debts brings companies wanting to take advantage by charging high fees for refinancing in their debt consolidation loans. Often the fee amounts nearly reach the state maximums for mortgage fees. Some unprincipled companies will intentionally wait for a debtor to get so far in debt that they must refinance and consolidate their debts in order to pay off bills that are past due. Often the debtor will pay the high fees so they do not lose their home. Sometimes the debtor does not know to shop around for lower interest rates and fees, or does not have the time. Companies that partake in this practice are known as predatory lenders. Most debt consolidation loans and transactions do not include predatory lending practices.

See Also: What are the benefits and Negatives of debt consolidation?

Photo Credit: www.low-interest-rate-credit-cards.net

In these tough financial times, I’ve been a big proponent of people cutting up credit cards with high outstanding debts and paying them down.  In general, that goes counter to what many financial analysts have been telling people to do, saying it will bring down credit scores.

My point has been that credit scores mean nothing if a person continues wracking up more and more debt, as that also hurts one’s credit score, and that it’s better to gain control over spending while working towards getting out of debt.  A high credit score only tells people that you look like a good risk at getting more credit.  However, if you’re already overly maxed out, you’re already past the point of no return, and it’s more important to gain control.

That’s why it was good seeing a statement coming from Greg McBride, the senior financial analyst at BankRate.com.  He stated just what I’ve been saying for months now:  “Consumers have a tendency to focus on the nuances of credit scoring and often lose sight of the bigger picture.  They are so worried about something hurting their credit score, particularly in an environment like this one where lenders are tightening up and making it harder to qualify, that they are willing to live with bad terms that they never would have agreed to in the first place.”

These days, credit card lenders have started penalizing their good paying customers to recover from those customers of theirs who have had problems keeping up with their debt.  Recently, Capital One began jacking up some of their customers rates more than 7% in an attempt to get back to solvency.  American Express went a different way, by capping limit amounts on cards and making people pay more to pay off their monthly balances.  Both alienate their customers, but the worst part is financial “experts” going on TV telling people that they should just accept the limits, pay off the cards, and protect their credit scores.

If you’re someone who pays off your monthly balances as soon as you accumulate them, having your interest rate jump that high that quickly may not impact you much at all.  However, if you’re someone who carries a balance, it might not be in your best interest to keep that card, especially at a much higher rate.

A calculation might help you understand what you might be up against.  Say you have a balance of $2,000, an annual percentage rate of 13.9%, and your monthly payment at the present time is $35.  If you always paid $35, even though the amount of your minimum payment will go down with your balance, you’d end up taking 7 2/3rds years to pay off your balance.  If you take those same numbers, only increase the APR to 20.9%, it would take you 25 3/4ths years to pay off the same balance.

Is it worth any credit score to allow banks or other lenders to take that kind of advantage of you?  It’s something to seriously think about.

See more:
Credit Card Debt Consolidation
Should I Cancel My Credit Cards?
How to Get Out of Debt Part I