Debt Consolidation Loans Helpful or Hurtful ?

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Debt Consolidation Loans Helpful or Hurtful?

Debt Consolidation is often marketed to consumers as a way to roll all your debts up into a single Account In a way, this is accurate, but that sentence portrays debt consolidation as some kind of easy fix its not Debt consolidation is a new line of credit with a financial institution; usually a home equity loan (the funds backed by collateral, i.e. your house), a personal loan or a credit card The idea is that you use the money from your new line of credit to pay off all the other debts you owe At that point , you are left with one single monthly payment instead of multiple ones, making It easier to manage your finances

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This can be useful for several reasons; one being that interest is only accumulating for one account instead of multiple accounts
Meaning you have a relatively concrete knowledge as to what your monthly charge will be and can therefore budget accordingly Secondly, if you qualify for a home equity loan or a personal loan, your interest rate will likely be significantly lower than a credit card, especially if you are currently paying multiple credit cards at varying interest rates

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If you dont qualify for a home equity loan or a personal loan, there are specialized debt consolidation companies that are available to help you However, there are some higher risks involved with these types of companies, including higher rates of interest than other loans If your credit is even remotely damaged, the interest rate you will get on this loan is likely to render negligible any improvement from your current situation

Debt consolidation can be a suitable solution to credit card debt, utilities and similar types of consumer loans But it is important to be aware that it is not necessarily a solution to all your debt your mortgage, for example, would not qualify In order to qualify for a consolidation loan, the customer usually needs to have a good credit rating and be financially solvent (i.e. have a sufficient income to be able to make the payments on the loan) An unacceptable credit rating will mean you are unable to get a debt consolidation loan

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If you have experienced some type of financial hardship and are having trouble making your payments, it is probably a good idea that you dont get a consolidation loan It might sound simple but there are definite risks involved An integral element in terms of your credit score is the amount of credit you have available and how much of this credit you are using If you close the accounts once you have consolidated your debts and paid off your existing creditors

You are reducing the amount of credit you have available, which could damage your credit score However, this is kind of a Catch-22, because leaving the lines of credit open will make it very tempting to use them again If you do this, you can end up with the exact same debt problem plus your consolidation loan for your previous debt

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This could put you in such a financial hole that you are forced to consider more serious options Such as a debt management plan, a consumer proposal or filing for bankruptcy All of these will seriously damage your credit for a significant period of time A further option would be debt negotiation, which is a less official form of debt-relief option, but can still impact your credit

In essence, a debt consolidation loan can be helpful if you are able to control your spending habits and can afford the monthly payments

However, it is important to consider the risks listed above If you have several years worth of on-time debt repayment
And are completely certain you are financially responsible enough to be able to set a strict budget and stick to it, perhaps a debt consolidation loan is a good choice for your situation

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However, if you have even the slightest worry about not being able to make the payments or being tempted by the newly-freed-up lines of credit available to you, a debt consolidation loan is probably not for you There are a variety of other debt relief options all will impact your credit in some way, but they also ensure you are accomplishing your goal of getting out of debt, Without providing the tantalizing distraction of those freshly-paid-off credit cards, which is one of the primary risks of debt consolidation

Debt negotiation can be a great alternative to consolidate loans since debt negotiation programs are not credit score driven (you can have good or bad credit to qualify)

Nor does it require you to securitize your debt by a physical asset such as your home or car
No home ownership or equity in your home is required to do debt negotiation Debt consolidation can save you interest however debt negotiation can save you thousands in interest but also possibly thousands in the PRINCIPAL amount you owe

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