Deciding Whether Debt Consolidation Loans Are a Good Idea
If you’re dealing with ridiculous amounts of debt, you know that just keeping track of payments – what is owed to whom, and when – can be a full-time job in itself. Additionally, high interest rates and late payment charges can make clearing your debts feel like you’re trying to reach an unattainable goal.
As soon as you start to pay one down, another goes up. It’s a complicated, stressful, and ultimately overwhelming situation.
If you’re facing the challenges above, you’ve probably found yourself wondering whether or not a debt consolidation loan is a good idea for you and your finances. After all, on the surface, these loans sound like a great idea: They allow you to pay off your existing debts and instead make one lump sum payment per month. But is it really that easy, or are there hidden caveats to consider?
The Best Aspects of Debt Consolidation Loans
To get an accurate idea of whether or not debt consolidation is right for you, review the list of “pros and cons” provided below:
Pros of Debt Consolidation Loans:
Lower monthly payments. Not only can debt consolidation loans potentially lower the overall interest you’re paying on your debts (e.g., if you pay off a credit card with 25% interest using a loan with 10% interest), they typically spread your payments out over a longer period of time. This means that the amount of each individual payment is reduced and you may pay less overall, thanks to lower interest rates.
Simplified debt management. Instead of keeping track of numerous different debt payments, after consolidation you will have just one payment to worry about each month. This saves a lot of time for many people as they’re no longer juggling multiple billing statements, nor do they have to create payment calendars to ensure they meet each due date and pay the right amount to each creditor.
Psychological relief. No longer having to field numerous phone calls from unhappy creditors or struggle to manage a complex financial situation every month provides a great deal of psychological relief for most individuals. The importance of this effect should not be underestimated: The less stressed a person is, the better they can sleep and the better they perform at work. This enables them to be more productive and further their careers, potentially yielding more money with which to pay down their debts.
The Ugly Side of Debt Consolidation Loans
It’s not all positive with these loans or any other kind of loans. In fact, they can be a serious threat to your financial health now and well into the future.
You may jeopardize your home. It’s important to understand what kind of debt consolidation loan you’re dealing with before you take one on. Some loans consolidate your debt into your existing mortgage or rely on the use of home equity, and these loans can put your home at risk.
If you fail to make the payments on time, your home could be put into foreclosure. Make sure you understand the type of consolidation loan you’re dealing with before you sign off on it.
You could pay more for your debt over time. While many people end up saving money via consolidation, this is not always the case. Because most consolidation loans extend your debt out over a long period of time, it’s possible to end up paying more (in the form of interest) for your debt.
Whether or not this will happen to you depends on how much debt you have, what interest rate applies to your consolidation loan, and how long the payment term is. It’s worthwhile to sit down and crunch the numbers to see whether you’ll save or lose money by consolidating your debts.
You may need someone to co-sign for your loan. People who have a poor credit score (which is, of course, a lot of people who have to apply for consolidation) often have difficulty securing a loan on their own. If you’re in the aforementioned situation, you may need to find someone who will co-sign your loan for you. If you’re single and lack close familial ties, this can pose a significant challenge.
You Must Go Beyond Your Loan to Succeed
The biggest blunder you can make with consolidation loans is believing that when you are given one by a lender, your debt will be all taken care of. That’s a critical error many people that fail with this loan make. In reality, your hard work has just begun.
After getting the loan, you must now deal with the problem that put you in debt in the first place. Whatever was the cause of your financial troubles, you must tackle it head-on. Don’t brush it aside without developing a real plan for conquering it. That would be a crucial mistake that can come back to bite you in the you-know-what.
Imagine not doing this step. What do you think would happen to your finances? They will probably deteriorate again, and you’ll be in a crisis.
But the next time you might not be so lucky. You might be able to qualify for a debt consolidation loan. And you may not have any other good options available to you. Not to mention all the joyous things you can miss in life when you don’t have money to spend. The negative effects of debt can be felt in so many areas of your life.
So What’s the Bottom Line with These Loans?
In conclusion, debt consolidation loans can be an excellent strategy for getting your debts, and your life, under control. Like all legally-binding agreements, however, it’s important to read the “fine print” and know what you’re getting into.
It also doesn’t hurt to sit down with an accountant and crunch the numbers in order to see whether or not consolidation will really save you money over the long term. And remember—just because you consolidate your debts, that doesn’t mean you can spend more! Make sure to maintain a frugal lifestyle and focus on getting your debt paid down as soon as possible.