The Facts About Debt Consolidation

Most people read a headline like that, and they’ll think one of two things to themselves:

1.What’s debt consolidation?

or...

2.The words “best” and “debt consolidation” don’t belong in the same sentence.

To clear up some of the confusion and some of the bad air surrounding debt consolidation, I thought we’d take a look at some of the major pros and cons of consolidating your debts.

But first, let’s look at what debt consolidation means

You see the ads for it on TV and the internet daily; it seems everyone’s beating each other down for the chance to help you consolidate all of your unpaid debts. Debt consolidating means taking out one major loan to pay off a bunch of other loans and credit lines. As you can imagine, there are a lot of pros and cons to a method of debt repayment like this, so let’s cover ‘em:

Pros

• One big debt vs. several smaller ones. If you have a lot of creditors beating down your door to get at your funds, you probably already know it can tough to keep track of what you owe to whom. Having only one major debt to cover all the smaller ones makes managing your wallet a little easier come bill pay day.

• Lower payments and interest rates. Another big plus for debt consolidation is that one payment doesn’t carry over the interest rates of a lot of smaller ones. Typically, those who take out consolidation loans take the home equity loan, which is a secured debt. With that kind of collateral, lenders typically reduce the monthly payments and interest rates.

• Easier to manage. One major loan means only one major creditor to deal with, instead of several. This can make your finances, once a casualty of chaos theory, a more manageable obstacle.

Cons

• Very slippery debt slope. Now that you only have one debt to worry about, you might be tempted to break out the credit cards again and start charging. This is generally not a good idea when your major debt is tied to something secure, like your home.

• It takes much longer to pay off. If your consolidated debt is tied to your mortgage, you could be extending its life by tenfold. Most mortgages last anywhere from 10-20+ years. Do you really want to be tied up in credit card debt for THAT long?

• You’re actually spending more money in the long run. True, the interest rate and monthly payments are lower, but extending your payment by as many as 25 years will add up to more in the long run than if you decided to keep the loans separate.

So is debt consolidation the right choice for you? As you can see, there are definite pros to the concept, as well as some serious cons. Ultimately, your individual situation should dictate the best option, but if you do decide to go with debt consolidation, we’ll have some reviews of the top firms to help you get back on your feet in the coming weeks. Check back for it!