Why Consolidate Debt?By Mohit of Picmoney.com
People consolidate debt in order to reduce their monthly payments. With a consolidated
loan, financial institutions such as banks and credit unions pay off all of a consumers loans
and replace them with a single "consolidated" loan of all the combined debt, usually at a lower,
fixed interest rate. Consumers can use consolidated loans to pay of on automobiles, credit
cards, student loans, medical bills, etc.
If you can't meet your minimum monthly payments, if your loan or loans still have a lot of life
left to them, or if you can get a lower, fixed rate, then it may be worth it to consolidate.
But there are some questions to ask yourself first: Are you willing to extend the life of your
loan in exchange for lower payments? This is typically how financial organizations are able to
offer consolidated loans at such lower rates.
Are you ready for a new 20 or 30 year commitment? And most importantly, are you aware that when
you consolidate your and extend the repayment term, while it reduces your monthly payments,
it will actually increase the total dollar amount of interest you?l pay over the long haul?So ask
yourself, how close are you to paying your loans off? It may be more trouble than it? worth, and
way more costly, to consolidate for a lower rate if you only have a few more years of payments
under you existing loans.
One of the most common ways to consolidate loans is to use the equity
in your home. This can be as risky a venture as it is convenient. To consolidate this way, you
would be turning unsecured into secured debt.
You now have even more to lose than before if
you should default on your new consolidated loan. At least with your current loans you don? have
the items you purchased on your credit card taken away from you. But with a home equity
consolidated lender will not hesitate to take your house if you fail to make your payments.
Another type of consolidated loan to beware of is the consolidated loan that offers you an
unbelievably cheap interest rate even if your credit is lousy.
The catch with this type of consolidated loan is the exorbitant application fee.
If you can afford the application fee, you're better off applying that same amount to paying off your debt.
Plus, there are so many wolves in sheep's clothing offering these types of consolidated deals,
you may never actually see you consolidated loan when all is said and done.
With those warningsin mind, it may still be well worth your while to consolidate debt, and to do it sooner than
later. For one, the opportunity to consolidate may not be around for very much longer.
Both congress and the President are considering legislation that could turn fixed interest
consolidated loans into variable rate loans, or get rid of consolidated loans altogether.
If you chose not to consolidate your loans, or are unable to for any reason to consolidate,
you could also consider having payments automatically deducted from your bank account on a
regular basis. While it doesn't lower your expenses like a consolidated loan, it does ensure
that your payments are made on time, and it will help you improve your credit score.
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