Consolidation loans can be good, but only if you’re the right fit. Let’s talk about the pro’s and con’s of a consolidation loan versus consolidating your debt.
A consolidation loan is taking a loan out to pay off your existing creditors. Two things need to happen for this to be successful for you. One, you must insure that your new APR (Annual Percentage Rate) with the loan is less than the total of your outstanding debt, and secondly, you must close off all of the accounts that you just paid off with the loan. If you can do these things, a consolidation loan could be good for you.
Now lets look at the negative. What you’re doing with a loan is converting unsecured debt into secured debt. If you don’t change your spending habits you could be in a worse position than before. Remember, now that you’ve paid off your credit cards, the credit card companies will be eager to renew your cards, with an even higher spending limit.
Quite often, the consolidation loan is a second mortgage which is secured by your home. If you default on your monthly payments, you may lose your home.
So it is important that you get into a debt management program to help you avoid future credit problems and avoid potential bankruptcy.
A debt consolidation program is much different. In general, with this kind of program, all existing creditors remain the same, except that either through your efforts or a debt consolidation company, interest rates are renegotiated, reduced or eliminated so that your monthly payments are far less.
If you work closely with your creditors, and once again, totally change your spending habits, you may be able to eliminate your debt in 3-5 years.
Both programs have their merits, and it depends which program best fits you.
Consolidation Loan: The good, the bad and the ugly of Consolidation Loans
