Debt Consoldation
Being buried in debt has serious implications on both the financial life and the emotional life of a person. With debts all around the future may seem quite hazy and the present may be troublesome. Debts could be a result of improper management of finances, sudden exigencies cropping up, uncontrolled purchasing habits or a mismatch between the income and expenses. Whatever be the reason, getting rid of this burden is what matters most.
The consolidation solution:
Feeling helpless will not get you any solutions, and you must get determined and update your knowledge regarding debt solutions. There is no need to be disappointed because millions of people who were deep stuck in insurmountable debts have used consolidation programs to come out of their desperate situations and are leading are happy life. So go ahead, analyze your situation and get some knowledge and work your way out of debts with debt consolidation programs.
A situation where an individual is burdened with multiple credit card debts, car loan, personal loan and home mortgage is commonplace. And in such a situation just paying back the minimum payment may not take you anywhere because the outstanding balances wont show any difference even after months and months of regular minimum payments.
Debt consolidation is such a wonderful way to handle debt
related problems, that most experts would advise this to be the first step towards managing your debt problems. Debt consolidation is a great method to organize multiple debts in a better manner, making monitoring and payments relatively simpler. Normally when you have debts taken from different resources, each of these would come on a different rate of interest. This would mean not only wasting your time in dealing with several different lenders but also your money getting wasted because some of your debts may be on a considerably higher rate of interest. Using a consolidation program you will combine all your debts into a single loan from a single lender and on more pleasing interest rates. In the process while you make significant savings because of the reduced interest rate, it also becomes easier for you to monitor your finances and pay off your debts much sooner. This one step in the right direction can save thousands of your dollars, hence never ignore this option.
Even though debt consolidation programs are highly recommended by experts and financial institutions, still you must analyze and evaluate the effectiveness of the consolidation program specifically with regards to your current debt situation. Undoubtedly, consolidation offers a multitude of benefits to the consumer but everything in life has a positive and negative side and so there are disadvantages as well associated with debt consolidation programs. Lets take a look at some of the pros and cons of debt consolidation programs.
The Pros:
1. Single month the payments: after consolidation of all your debts you will have to make just to one single monthly payment as against the multiple monthly payments that you have to make for all your debts. On an average the people under the burden of debts in the United States of America are nearly paying more than five monthly payments to different creditors. Dealing with too many creditors can be a problem, as you need to keep track of to whom you have to pay, how much to pay and by what date. On the other hand managing finances becomes much easier with consolidation because you have to keep track of only one loan.
2. Reduced rate of interest: debt consolidation programs are usually secured debts and so the interest rate applicable on these are much lower compared to other unsecured debts such as credit cards. The most common type is the home equity loan which is usually referred to as a second mortgage, and if this is what youre planning to use then you can get the best interest rates possible. When you take up a secured loan, the creditor has some way of recovering his money in the event that you fail to pay back, and that is what brings in the lower interest rate.
3. Manageable monthly payments: because of the drop in the interest rate that comes around with consolidation of debts, the monthly payments also reduce significantly and it becomes easier for you to manage within your current income.
4. Single Creditor: after consolidation you will have to deal with just one creditor which is definitely going to make your life much easier. Dealing with too many creditors is not just frustrating and time consuming but even expensive.
5. Tax advantages: certain debt consolidation programs can offer you tax deductions as well, especially when you are taking a home mortgage on which you get a tax deduction for the amount of interest paid over the loan. This is really beneficial when you compare it with credit cards with there are no tax advantages in spite of the high interest rate.
These advantages can definitely make the temptation, of using the consolidation program, irresistible; still you must take a look at the other side of the picture as well.
The Cons:
1. Chances of getting into further debts: the consolidation program will make it easier for you to manage your total debts, which can again lead you to collect more debts such as making purchases against your credit card because your credit card limit becomes free of the outstanding balance. However, practicing controlled pending habits can keep your future prospects safe.
2. Longer payback time: if you plan to use a second mortgage for consolidation, the term of your mortgage will be usually between 10 to 30 years, which will mean it will take much longer to free your house from the loan.
3. Increase in the interest amount: although your consolidation loan will be on a lower rate of interest, but in certain cases extending the term length of the loan might cancel out the savings because the total amount of interest that you will pay over the new term may be more or less the same as what you would have paid if you had gone ahead with the individual debts.
4. The risk: most debt consolidation programs are secured loans and in case you fail to make your payments in time you can loose the valuable asset that you may have pledged to take up a consolidation loan. Debts taken from sources such as credit cards are unsecured and so even if you fail to pay back your valuable assets like your home or car will still remain with you.
Consolidation of debts is a great way to get out of your debt problems, but this solution may not fit every individuals situation. To proceed further with consolidation, you need to be realistic and carry out a detailed evaluation of whether or not, you are getting some benefit out of the whole process.
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