Debt Consolidation Loan
Is a debt consolidation loan a good idea?
Many loan companies advise getting a debt consolidation loan, and they do very well at informing people of the benefits. Even so, it's a good idea to give the idea some in-depth thought before signing up. That's because these loans can be great for some people, but they're not the best solution for all.
On the pro side, a debt consolidation loan gets rid of a multitude of bills so that you only have to make one payment per month. The interest on this one payment will typically be lower than what the original creditors charged, so you will often end up saving money. If you would find a single monthly payment easier to handle, then this may be a great solution for you.
The biggest con is that you run the risk of ending up in more debt if you consolidate your bills. That's because unless you close your old accounts, you'll have the temptation of a wallet full of paid-off credit cards. Anyone who has had trouble with credit card debt knows that those cards will be constantly playing a siren song, urging you to max them back up. If you do so, you'll end up with all of your credit card debt back along with your debt consolidation payment!
In order to avoid succumbing to this temptation, you should close out all of the credit card accounts that have been paid by the debt consolidation loan. Even though some advise against closing accounts because it can lower your "average age of accounts" in your credit score, it's worth it to prevent the chance of re-maxing the cards and suffering subsequent double debt.
Another issue to keep in mind is that some debt consolidation loans are secured – most typically, by your house. A refinance broker can typically use this collateral to get much better terms on your debt than you could get from credit card companies. However, you are also turning the unsecured debt of credit cards into a secured mortgage debt. Therefore, you must be careful to avoid continued use of the credit cards you just cleared out.
As long as you take care not to end up overextending yourself, a debt consolidation loan can indeed be a good idea. If you think you can resist the temptation to re-max empty credit cards, your next step is to talk to loan companies to see what they offer. Another way to save money on debt payments is to take advantage of lower mortgage interest rates. A refinance broker will be especially helpful in this case, and may be able to work consolidation money into the plan as well.