Consolidate Debt
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Many consumers consolidate debt by taking several different credit accounts and turning them into one account, preferably at a lower interest rate. Consolidating debt can save borrowers hundreds or thousands of dollars in interest payments, but it is not always an automatic fix to all financial woes.
One Payment Versus Many Payments
By consolidating many different accounts, such as credit cards, personal loans, and auto loans into one account, the borrower only has to make one payment instead of several payments throughout the month. Many people find this arrangement helps them to pay their debt faster because the debt is less daunting in a psychological sense. With one simple payment, many borrowers find that they are better able to put more money towards the total debt instead of scattering payments among several different accounts.
Save Money in Interest
Consumers who take several revolving accounts and consolidate them into an installment loan at a fixed interest rate may be able to save considerable money in interest payments. Consolidating for the sake of getting all accounts into one payment with no regard for the interest rate, however, is not a good move. People should be sure to know what their current interest rates are, and what the new interest rate will be upon consolidation. It can be a great idea to consolidate debt, but if the debt is consolidated into a higher interest rate, it makes no sense.
Consolidate Debt for Tax Breaks
Although it depends on the borrower's particular situation, some debt consolidation loans, like home equity loans, may provide certain tax advantages. If you're considering a home equity loan for consolidation purposes, you should check with a competent tax consultant before assuming your will be able to take a tax deduction.
It should also be noted that caution should be taken when using a home equity loan to consolidate debt. Unlike unsecured debt, a home equity loan uses your home as collateral, and if you don't make your payments you may lose your home.
Should You Consolidate?
If you have several accounts which you would like to combine into one payment, a debt consolidation loan can be a good idea. Check with your bank or credit union to inquire about the interest rates they offer for debt consolidation loans to make sure you are not consolidating your debt into a higher interest rate. You should additionally have the intention of closing the consolidated accounts.
If you are not willing to close the accounts you pay off with a debt consolidation loan, then you may not want to consider consolidation. The reasoning behind this is simple: there is too much of a temptation to start using the newly-paid off accounts again, and this can result in you winding up right back where you started. You'll have all the bills you had before, but with an additional debt consolidation loan payment.
Find a Lender
Most banks and credit unions offer unsecure debt consolidation loans to consolidate debt. Consumers can either check with the financial institution which they already do business with, or they can do a quick internet search to find the lender with the lowest interest rates and best terms.
Potential applicants should only do business with reputable lenders, however. If an internet search yields the result of an unknown lender with fantastic rates, the borrower should really take the time to research the lender before supplying their own personal information.
Remember, consolidation loans should only be utilized when the borrower plans on closing the accounts which are paid off with the loan. Without closing the accounts, the borrower runs the risk of winding up with even more debt than he or she had to begin with.
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