In a debt consolidation, you can combine your various debts, such as credit card accounts and auto loans, into one loan. The process involves getting a loan and using the proceeds to pay off multiple existing creditors. A debt consolidation loan helps you arrange your finances, but you must evaluate the potential problems before moving ahead to avoid digging yourself into a financial hole.
One Monthly Payment
A consolidation loan allows you to make one payment per month instead of several payments each month to different creditors. The singular payment makes money budgeting easier; in some cases, the payment is lower than the total of your previous monthly payments combined. Consolidation can help you eliminate late fees and penalties you were charged if you missed a payment because you were having difficulty keeping track of multiple creditors.
Possible Debt Increase
You are at risk of racking up more debt after a consolidation. Previous lines of credit you kept after paying off with the consolidation proceeds are still available for your use and have a full or near-full limit available. Your lower consolidation payment makes overspending tempting, as more of your money is free each month.
Lower Interest
You usually consolidate your debt with a loan or on credit card with a lower interest rate than the rates you had previously. Some people move high-interest credit card debt onto one card with a lower rate, while others get a secured loan with a low rate, such as a home mortgage. The total interest you would have paid on the consolidated accounts over time is slashed when you consolidate the money owed, lessening your total debt.
Duration and Potential Property Loss
A consolidation via a home mortgage or personal loan takes longer to pay off. Personal loans and home loans have set yearly terms, and you end up paying for a longer period of time with a new loan than you would have before.
In addition, your home secures your mortgage, and you could lose your home if you do not make the monthly payments.
0 comments:
Post a Comment