Debt consolidation can help lower your monthly payments, and may help you get out of debt more quickly. Debt consolidation is done by taking out one large loan and using it to pay off several smaller loans. This can lock in a set interest rate and reduce the total amount you pay in interest for the loan.
Choose a Set Interest Rate
One advantage of consolidating loans is that you have the opportunity to lock in a lower interest rate than you would have if you continued to pay the loan on credit cards. When taking out a consolidation loan choose a loan that offers a set interest rate. It does not make sense to consolidate loans that have a lower set interest rates into your loan if the interest rate is higher than you are currently paying. A variable rate means that the interest rate can go up if the market changes.
Do Not Attach Unsecured Debt to Your Home
It is not uncommon for people to take a second mortgage or to use a home equity loan to pay off debt. This is a form of debt consolidation, but it ties the unsecured debt to your home. If you were to lose your job or became unable to make payments you could lose your home. However if the loan was not tied to your home, you could quit making payments on it during a difficult time, and continue paying on your mortgage and be able to keep your home. This is the most common consolidation mistake.
Limit the Length of Your Loan
You can lower your monthly payments by extending the term of the loan. For example a payment would be lower if you paid the loan off in ten years instead of five years, but you will pay more in interest over time. If you are taking out a consolidation loan to get control of your payments, work out a budget and figure out how much you can handle paying each month and choose that term instead of the smallest payment option available to you.
Change Your Money Habits
Many people, who take out consolidation loans to pay down maxed out credit cards, find themselves in a similar situation in a few years time. They do not address the spending habits and financial problems that brought them to the point of needing to consolidate, and end up digging another financial hole, only they still have the consolidation loan to pay off. Stop this from happening to you by following a written budget each month and cut up the credit cards you have paid off.
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