You've probably heard of a debt consolidation loan. Just what is a debt consolidation loan, and how can it help you improve your financial picture? A debt consolidation loan is basically a secured loan taken out to pay off many other financial obligations, typically unsecured debt, such as credit cards or store accounts. Credit cards and store charge cards tend to have comparatively high interest rates. In addition, many of these types of accounts have annual or monthly fees associated with them that raise the cost of your credit even further. Because they are unsecured debt, credit cards have to charge these higher interest rates. By using a loan that is secured by a stable, high value asset, such as real estate, the loan can have a much lower interest rate. In many cases, the term of the loan can be fairly long as well, typically 5 10 years or so. The combination of the lower interest rate and the long term of the loan means that your payment on your new debt consolidation loan will be fairly low. It will be much lower than the total payments of the credit cards you used the new loan to pay off. The reduction in your monthly financial obligation can be a huge help. You now only have one low payment each month. This one payment replaces a payment for each of your credit cards you are now paying for. The multiple payments for all the credit cards add up to a much larger bill every month than the new consolidation loan's payment. This can obviously improve your monthly cash flow picture considerably. There's another, huge benefit as well. Because you're only making one payment each month, instead of many smaller payments, it is much more convenient, and takes much less of your time. Instead of going through your credit card statements and laboriously writing a bunch of checks, you can be doing something else. Probably the best thing about a single payment is that it's almost impossible to accidentally miss a payment. The costs for accidentally missing a payment or having a late payment can be severe. You'll be charged late fees and probably have the interest rate on your credit card increased as well. Ouch! To make matters worse, late payments are reported to the credit agencies, making it possible for all your other cards to increase their interest rates to you as well. Is there a possible down side to debt consolidation loans? Well, of course there is. Everything has a potential dark side. Because you are usually securing the debt consolidation loan with real estate, typically you home, you can lose your collateral if you default on the loan. That is a pretty serious consequence. If you got into your credit card trouble because of excessive spending, it's essential that you fix your spending habits before you eliminate your credit card debt by using a debt consolidation loan. If your credit card debt piled up due to unforeseen circumstances, such as medical problems or emergency car repairs, you don't have nearly as much to worry about. A debt consolidation loan can free up extra cash to put into savings every month. That's hard to find and can really improve your financial future. You can invest the extra cash and build for your future, instead of giving it to the credit card companies every month and building theirs. |
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