Debt Consolidation Loan Consequences

Dealing with too much debt can lead to a great deal of anxiety and stress. If you can barely cover the minimum payments on all your credit cards and other bills every month, a debt consolidation loan may be a good way to get on top of things. There are several consequences you need to consider first, however.

A debt consolidation loan is essentially a loan for the total of all your existing debt. It may just include your credit card balances, or it may go further by covering other debts such as car loans or department store credit. The consolidation loan is used to pay off all the other debts, leaving you with a single monthly payment which is often at a lower interest rate.

Before you decide to pursue a consolidation loan, there are some alternatives that can help with your debt.

1. A Lower Interest Rate

Credit cards tend to have the highest interest rates of most debt, but quite often it is as simple as calling and asking them for a lower rate. There are plenty of competing credit card companies just itching for your business and if you call the one you already deal with and ask them to match someone else's rate, 9 times out of 10 they will do so.

2. Manage Debt Effectively

Rather than getting a loan to consolidate your debt, you might simply need to learn how to effectively manage the debt. There is plenty of information available for free on the internet, and most cities have non-profit organizations that will help you with debt management.

3. Get A Bank Loan

If most of your debt is on credit cards, you may only need to consolidate that debt into a single loan. Your bank may be able to offer you a better rate on a smaller consolidation loan to cover your credit cards, while leaving any other debts where they currently are.

Consolidation of debts can efficiently save you money and decrease the monthly stress of locating money for multiple payments. If you're dealing with unmanageable debt, this may be the solution for you.

One of the solutions that is often advertised to help people get out of debt is the use of a debt consolidation loan. The idea behind a debt consolidation loan is that most people who are in financial trouble have several small debts that require monthly payments. These payments combined become large enough that people generally end up paying just the minimums, and never are able to chip away at their borrowed balance. A debt consolidation loan offers some advantages to other debt reduction alternatives, but also has some negative consequences to be aware of. Some of the pros and cons include:

Pros of Debt Consolidation

- Payment Advantages and Simplicity: Instead of having several loans outstanding, the debtor has only one loan. This means only one payment, and the minimum payment is generally lower than if you combine the minimum payments on several outstanding debts. This significantly simplifies the borrower's financial life. Having only one creditor expecting a monthly payment instead of several also simplifies things for the borrower.

- Lower Interest Rates: A Home Equity Loan is generally what is used to consolidate debts - proceeds from a Home Equity Loan are used to pay off all outstanding debts and then a single payment is made monthly to pay down the Home Equity loan. These loans are generally at interest rates tied to either Prime or LIBOR, and are usually much lower than most revolving lines of credit, such as credit cards.

- Tax Advantages: Payments toward home equity loans are usually tax deductible.

Cons of Debt Consolidation

- Temptation: Once your credit cards are paid off through debt consolidation, it's tempting for many people to start using them again to add to their overall debt balance. Additionally, with a lower overall monthly payment, a borrower might feel like they have more money to spend. Paying off debt requires discipline, and a debt consolidation loan won't help if the borrower lacks the self control to stop spending.

- Your Home is at risk: If you default on a credit card payment, you'll pay a late fee and you may hear from a collector. If you default on a home equity loan, you could lose your home, which secures the credit you used to pay off your debt.

- Your debt will last longer: Unless you make more than the minimum payment, home equity loans are often based on a 30 year time frame. You'll be paying down your debts longer if you only pay the minimum, and in the long run you'll end up paying more interest overall.

If you do not own a home or you own a home with no equity, there are companies who offer debt consolidation loans. The rates maybe higher than on a typical home equity loan and will vary based on your credit history, but could still make debt problems manageable. While debt consolidation can be effective, it's not a magic pill. The borrower will need to focus on changing the behavior that created the debt problem in the first place. Overall, however, debt consolidation is a viable option for many indebted people.