Practicalities of Debt Consolidation


For some people, and we emphasis here is on the word some, debt consolidation may be a good tool. There are obviously several factors in play, should one elect to go this road, the principal one being interest rates. (More on that in a minute). However, debt consolidation may be very practical and cost-effective solution to take if the circumstances are all correct.

Debt consolidation in essence, consists of taking out one loan as a way to pay off several other loans and debts you have with multiple lenders. Done right, it can be a useful tool for some people�.those with secured debt that is not negotiable.

However, aside from the practical aspect of having only one monthly payment, the bottom line remains; the interest rate on the new debt consolidation loan is LOWER than that of the existing secured creditors that you owe money to?

We should again emphasis that you would never want to take out a debt consolidation loan for something like credit card debt or other secured debt. The reason: these debts can be negotiated and settled for a fraction of what you owe through negotiations. Conversely, debt consolidation loans on secured debt, such as student loans for example.

Ease of management is another positive for a debt consolidation loan. One payment each month can be a lot easier than having to pay on four or five separate accounts each month. Nevertheless, a debt consolidation loan is not without drawbacks.

To begin with, a debt consolidation loan is still a financial loan. You have to pay the entire amount back, unlike a debt reduction program such as the one offered by Nationwide. Second, some of these debt consolidation loans carry hidden risks which you may well not be aware of.

One example of this would be the, “Zero Interest Credit Cards”. While these cards can be very appealing, it is necessary to fully grasp that:

The 0% interest rate does not last forever. Time limits are typically 6 months to one-year.
Miss a payment and the entire deal goes away immediately.
What will the new interest rate be, once the “teaser rate” expires?

Finally, are there any hidden fees, such a pre-payment penalties, etc? Again, debt consolidation loans can be good for some who want to consolidate secured debt. However, NEVER use a debt consolidation loan to pay off unsecured debt.