People who are considering consolidating their debts should weigh the costs before signing on to a debt consolidation agreement with a creditor or lender. The overall goal of consolidation should be to reduce monthly expenses and interest rates. A consumer can be left deeper in debt by not calculating the costs of consolidation.
Balance Transfers
Consider transferring credit card debt with high interest rates to a card with a lower rate instead of applying for a consolidation loan. Loan applicants usually face a longer approval process and pay several fees. However, credit card balance transfers have some drawbacks as well. A Bankrate article titled "Debt Consolidation: Cure or Continued Credit Problems?" says credit-card companies advertise low rates for balance transfers to entice consumers to move their accounts to a new card issuer, but only people with good credit ratings get the lowest rates. Furthermore, the low rates offered for balance transfers are usually temporary, so it's important to know how long a low rate will last and what the new rate will be when it expires.
Personal Loans
People who want to consolidate several types of debts may qualify for a secured or unsecured personal loan at their bank or credit union. Unsecured loans are more difficult to get because their approval is based solely on a borrower's creditworthiness. Secured loans are backed by personal property that could be sold to recoup the loan amount if the borrower fails to repay it. A "SmartMoney" magazine article titled "Should You Consolidate Your Loans?" notes that homeowners may qualify for a home-equity loan to consolidate their debts. According to the article, the interest on home equity loans is usually tax deductible if the loan doesn't exceed the value of the property. Home equity is determined by a property's value minus the balance owed on the mortgage.
Consolidation Costs
Ensure that your debt-consolidation plan will save you a significant amount of money to make consolidation worthwhile. Consumers who have low credit ratings may find that a debt consolidation loan or credit card balance transfer is more expensive than just paying their current debts. People who have low credit scores or who don't have property to secure a personal loan usually pay higher interest rates. "SmartMoney" magazine and other financial publications have consolidation calculators on their websites to help users determine how their consolidation plans will affect their overall interest rates and monthly costs.
Considerations
Consumers who are in financial trouble and unable to qualify for an affordable debt consolidation loan or credit card balance transfer may be helped by a debt management plan. Some credit counseling agencies offer debt management plans at a low cost to help consumers consolidate and pay off their credit cards and other debts. Counselors also work with consumers' creditors to reduce their monthly payments. The U.S. Federal Trade Commission warns consumers to avoid counseling agencies that won't supply information on their services free of charge. The websites of the Association of Independent Consumer Credit Counseling Agencies and the National Foundation of Credit Counseling offer information on finding a local counselor.
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