Debt Consolidation Requires Some Forethought
Millions of people owe more money than they should. The amount of debt held by Americans isn’t really a shock; no one saves money anymore. A lot of the staggering debt in this country is tied up in credit card balances. Credit card debt is particularly expensive, as the interest rates charged on balances are much higher than for other types of debt. One often-suggested solution to the problem of having too much or too many debts is to consolidate them. Is consolidating debt a wise idea? Is it the cheap solution that all of the companies that promote it really suggest?
Debt consolidation, on its surface, seems like a smart move. The average debtor has nearly ten thousand dollars worth of debt, but that debt is often spread among a number of different credit cards. Each card has its own due date, interest rate and minimum monthly payment. Each month, the debtor must write checks to every single one of his or her creditors. Debt consolidation companies simplify this process by providing a single loan for an amount sufficient to cover the balances of all of the debtor’s outstanding balances. The debtor then needs to write only one check each month instead of many. If the consolidation loan is secured, as with a home equity loan, the interest rate will be much lower than the rates charged by the credit card loans the new loan replaces. As such, the borrower can often pay less money each month than he or she was paying before.
In some cases, consolidating debt makes sense. Each borrower should carefully look over the numbers involved before responding to pressure from a consolidation company. Sure, replacing several loans with a single, low-interest loan is appealing, but that doesn’t tell the whole story. The real question is “How much will I pay back in total?” Many companies promise lower payments, but those lower payments are often achieved by extending the life of the loan. If you have credit card balances that you might be able to repay in five years, and you replace them with a home equity loan with a 25 year life, you might actually end up paying more money in the end, even if the interest rate is lower.
Sometimes, what seems to be a good idea is not a good idea upon closer inspection. If you are not sure whether or not a debt consolidation loan is right for you, consult with a reputable financial advisor.
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