When Do Consolidation Loans Make Sense?

Many people with seemingly impossible amounts of debt consider consolidation loans, which is simply a loan which allows you to combine many debts into one loan, usually has a lower interest rate than the individual debts.

While a lower interest rate is definitely an advantage, there are other factors worth considering. Read below to learn more about them.

Avoid More Credit Cards.

An aspect of consolidation loans which can trick many people is the fact that once you have one your credit cards are all paid off. Thus, you might be tempted to open some new credit cards. After all, now you're saving all this money, you can afford a few more cards, can't you? This is a train of thought you should never follow.

Avoid More Credit Cards.

One dangerous aspect of debt consolidation loans is that the lower the payments, the longer they last, sometimes up to twenty years. To avoid paying off your current debt for the next twenty years, try and find a loan that doesn't last as long, and ask for payments that are as much as you can afford. It's poor practice to look at what your payments would be and think ‘oh, how cheap!’, since this will extend your loan to what feels like forever.

The Interest Rate of The Loan.

As different loans offered have different interest rates, shop around to get the best rest rate you can. As this will be a large loan, the interest rate is almost as important as the one on your mortgage, and  is much harder to change after you've finished signing for it. As this will be a loan you'll have for a good deal of time, don't be fooled by any offers that give you a good rate for a limited time.

This doesn't mean, however, that you're going to have a higher interest rate than otherwise. One of the advantages of this, aside from paying all debt in one bill, is that the interest rate will be significantly lower than credit card interest rates. If you have lots of cards at a high rate and you can't transfer the debt anymore, then debt consolidation could be a very good idea.

Your Home Is On The Line.

This is by far the most dangerous aspect of debt consolidation. Almost without exception, the loan will be secured on your home. That means that if you start missing payments, the finance company will kick you out, take (‘"repossess") your house, sell it, and pay back the debt with that money. While they may work with you some to keep you paying (since it is a lot of work for them to sell your house), they won't be sympathetic to your situation.

If you do lose your home, don't expect to walk away with any cash. Plus, you probably won't be able to afford to buy a new house, and will have nowhere to live. Consequently, think strongly about whether you can handle the payments on the loan, and always be sure to read the fine print carefully. This may be an opportunity to pay off your debt, but know the risks before taking it.

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