Consolidation is the most misunderstood term in the debt
relief industry. Much confusion exists over what a Debt
Consolidation company really does and how it differs
from other forms of debt relief.
confuse it with Credit Counseling but since there are
loans involved it is not Credit Counseling.
attorneys advertise as debt consolidators but are really
only Bankruptcy attorneys.
the title "Debt Consolidator" has such a negative
connotation in the public arena many companies advertise
as Debt Negotiators. This is misleading since they work
to reschedule your debt not eliminate it.
Is Debt Consolidation right for You?
Debt consolidation can help you get control
of your money and reduce your overall debt.
You can use a debt consolidation service,
which will help you consolidate your debts
without taking out another loan, or you can
apply for a home equity loan in order to
consolidate your debts into a single loan at
a lower interest rate. But is a debt
consolidation loan the right choice for you?
That depends on your personal situation, how
much equity you have in your home, and the
real estate market in your area.
By taking out a debt consolidation loan, you can
pay off your credit cards all at once, reduce
your monthly payment, and save money on interest
over the long term. A home equity loan will also
have some tax advantages as some or all of the
interest may be deductible.
The Advantages to Debt Consolidation
Debt Consolidation reduces the risk of late
payments because you are only making one
payment a month, rather than trying to keep
track of several debts from different
sources with different due dates. A single
late payment can hurt your credit, but
worse, it can result in you paying higher
interest rates on ALL of your debts rather
than just the one you paid late.
A debt consolidation loan can help you
eliminate your credit card debt.
The Disadvantages of Debt Consolidation
It's likely that you'll be
required to put up some form of collateral in
order to qualify for a debt consolidation loan;
the most common form of debt consolidation loan
is a home equity loan in which you borrow
against the equity in your home. If you don't
make your payments, you run the risk of losing
your home. Additionally, if you find yourself
having difficulty in making your payments and
wish to sell your home, if the real estate
market in your area is soft, you may have
trouble selling your home, or selling it for
enough to repay your mortgage and home equity
A debt consolidation loan is a good tool, but
it doesn't address the underlying reason why you
got into debt in the first place. Unless you can
change your spending habits, and put those
credit cards away instead of running them back
up, you can find yourself even deeper in debt
than when you started out, and with no equity in
The Keys To A Good Debt Consolidation Loan
|For a debt consolidation loan to work:
- The interest rate on the new loan should
be less than on the debts you wish to
- The loan period (how long it takes you
to pay off the loan) should be the same
length, or shorter, than the previous loans.
A longer term will increase the amount of
interest you pay overall, and may make the
consolidation loan more costly in the long
- You should not be paying excessive fees,
such as high closing costs or points or your
decreasing or even eliminating any savings.
Questions To Ask Lenders
The Federal Truth-in-Lending Act gives you a
legal right to be informed of all interest and
fees that will apply to your consolidation loan.
Take advantage of this law and ask questions so
you can be sure you have enough information to
make the best choice for you. Some important
- What is the Annual Percentage Rate?
- Will it be fixed or variable?
- How much interest will I pay over the
life of the loan.
- What is the monthly payment and the term
of the loan?
- What are the application fees?
- Are there annual fees? How much are
- Will there be closing costs? How much
will they be?
- Is there a discount for automatic