The Risk and Reward of Debt Consolidation

It has never been more critical for the average consumer to take a hard look at their consumer debt than now. If you have found yourself significantly behind on your bills, an option to take a hard look at before filing bankruptcy is to seek debt consolidation advice. If you decide to pursue debt consolidation, you will be taking several of your debts and combining them into a single loan. Consolidating your debt can come in the form of credit card balance transfers, taking an un-secured loan, or using equity in property or your home to secure a loan.

Benefits of Consolidating Your Debt

Consolidating your debt can result in several benefits with the following potetnial outcomes: saving you money or lowering your monthly payments, or both. If you are able to consolidate your debt into a second mortgage or un-secure personal loan, you should be able to significantly reduce the amount of money that you are paying out monthly for servicing your debt.

If you have found yourself only paying the minimum payments on your credit cards, then a single payment on a consolidation loan can be significantly lower than that of the individual minimum payments. Another huge advantage of consolidating your debt is that you now have one monthly payment to worry about paying on time instead of many. This will help you in "forgetting" to pay bills on time and incurring late fees or other charges if you forget a bill or just can't pay it on time. Depending on your specific tax situation, if you use a secured loan such as a 2nd mortgage to pay off some of your debt, then the interest may also be tax deductible (this varies so ensure you get federal tax help when required).

Drawback to Consolidating Your Debt

Debt consolidation is not a solution that is good for everyone. If you are already delinquent on several bills with your credit maxed out, then it may be too late to qualify for a decent interest rate on a consolidation loan. If you are going to use your home in a secure loan, you also need to have more equity in the house than what you owe which may not be the case in the current economy.

You also need to take a hard look at your ability to live within your means before applying for a debt consolidation loan. Many times, consumers will acquire a debt consolidation loan only to run up their credit cards again after taking out the loan. When this occurs, they are left with a monthly consolidation loan bill on top of their recurring credit card bills. Bankruptcy may then become the only option to escaping debt.

If you decide to consolidate debt by transferring to a lower interest rate credit card, ensure you read the fine print before doing so. Sometimes, the 0 % interest deals that you get offered will default to a high interest rate after a given time-frame or if you are late on the account once. Even eviler is the case where if you fail to pay the balance in the stated time-frame, when the company applies the interest over the entire time period. At the end of the day, you want to ensure you have gotten good advice on debt consolidation before proceeding with a loan.