Consolidation Loans - Savior or Poison?
If you have multiple high interest credit
cards and other financial obligations, debt consolidation
or some other debt management strategy may be in order.
As you are by now aware, with a debt picture that
includes so many high interest obligations, you are
soon paying minimum or close to minimum payments every
month. This is just to make your interest payment.
Little or none of your monthly payment contributes
to principal reduction. Your loan or card principal
shrinks very slowly. It often takes years to pay off
such debts, if they are ever paid off. Many people
just keep their cards and other revolving accounts
maxed out. If they ever pay them down, they charge
them right back up again in short order.
You have several options, one of which
is debt consolidation. Debt consolidation entails
using a consolidation loan to pay off all your credit
card and other high interest loans such as car loans
and store charge cards. The consolidation loan has
a lower, usually much lower, than the other loans.
You can potentially get several advantages
from this debt reduction strategy. This assumes you
stop using the credit cards. If you dont stop, eventually
youll have the consolidation loan and new credit card
debt to pay off. You now have less or no equity in
your home to use as collateral, so you usually cannot
get another consolidation loan. Even if you could,
you must change your spending or you could end up
losing everything. Some of the advantages of using
a debt consolidation loan:
Youll pay off your debts and loans
more quickly. This is because of the (usually) much
lower interest rate on the consolidation loan. You
must stop using your credit cards for the faster payoff
to work.
Youll have a lower monthly payment.
In some cases it could be less than half the original
amount you were paying every month on your credit
cards. Its because of the lower interest rate your
monthly payment will be so much less. Most of your
monthly credit card payment is for interest, not principal.
Youll usually pay far less total interest.
This depends upon on the combined rate of your credit
card debt, the rate of the consolidation loan, and
the term of the consolidation loan. If you have a
large consolidation loan with a very long term, you
could still wind up paying substantial interest over
the term of the loan, even if your monthly payment
is fairly low. That is because you are paying on the
loan for such a long period of time. Make sure your
payments are low because the interest rate is lower
than your credit card interest rate, not because your
loan term is long.
It is much easier to make one monthly
payment than many. The convenience alone is a substantial
benefit. However, there is another benefit too. The
more payments you have to make, the greater odds you
will misplace a bill or not be able to pay one. Many
people wind up being late or missing a payment because
they have so many credit card bills they lose or forget
one of them. The late payment can trigger a clause
in your credit card agreement that allows the lender
to raise your interest rate. This creates another
problem when your interest rate is raised, causing
your monthly payment to rise yet again. In addition,
the late payment can affect your credit score. Other
lenders can use the change in your credit score to
raise your interest rate on some of your other credit
cards. You could wind up paying substantially greater
interest rates on many of your cards.
These are some of the reasons a consolidation
loan can be beneficial. They are not the right solution
for everyone however. There are many different lenders
with many different consolidation loans. You need
to evaluate your situation thoroughly and look at
all the many alternatives. You can then determine
if one of the different consolidation loan products
is the correct solution for you.
Steve writes about a multitude of topics
from home theater and automation to credit, business
and finance. See his website, The
Debt a nd Loan Consolidation Guide for more information.
