What Can Debt Consolidation Do?
Debt consolidation involves taking out a loan to pay off multiple loans or credit cards. Consolidation may include loans from banks, private lenders or credit card transfers. Consolidating can be beneficial for individuals attempting to pay off high interest rate debt. Consumers are encouraged to shop around for the best rates and investigate lenders before acquiring a new loan.
Other People Are Reading
-
Benefits
-
Consolidating high interest rate debts into one lower rate loan means less overall debt, lower monthly payments and the simplicity of a single monthly payment to one creditor. With a sound budget and financial planning, the right debt consolidation loan can help you get out of debt faster. Additionally, switching to a lower "fixed rate" loan offers peace of mind where interest rates on "variable rate" accounts may increase.
Disadvantages
-
When a consolidation loan is backed by collateral, such as real estate or other property, there is the danger of losing the property if payments cannot be made. Before taking out a loan against your home, vehicle or other property, make certain you are in a position to make the loan payments. Debt consolidation without a budget may result in running up accounts paid off with the new loan, placing you in a worse financial situation than before.
-
Credit Scores
-
Consolidating can increase your credit score by lowering your total debt-to-available-credit ratio. Lenders like to see credit reports where the available credit outweighs total debt. Adversely, closing credit cards or other revolving accounts after paying them off may lower your ratio, potentially lowering credit scores. Regardless of credit scores, individuals in danger of charging up open accounts after paying them off should consider closing the accounts to prevent overspending.
Considerations
-
Loans aren't free and consumers need to calculate the total cost of a new loan including monthly payments, interest rates and any additional fees prior to making a commitment. Generally, banks and credit unions offer the best rates, but if your credit score reflects a negative lending history, you may not be offered the best rates. Introductory credit cards offering zero or low interest rates for a limited time can be beneficial if you pay the debt before the introductory rate ends.
Concerns
-
Consolidation plans are not the same as consolidation loans. Debt agencies may advertise as debt management, elimination, settlement, consolidation or other plans. Unless the plan involves transferring debt from current accounts to a new loan, a consolidation plan may involve an agency negotiating with your creditors. While these programs may benefit some people, debt companies generally instruct consumers to stop paying on debts to increase the likelihood that lenders will settle. There is no guarantee that a lender will negotiate and delinquent payments can severely damage a credit report.
-
