Saving Money with Debt Consolidation Loans
What are the advantages and disadvantages of loan consolidation
Living within your means can be difficult. Setting up a budget, watching every penny and making the most from purchases will all help of course, but there are times when you get behind on your bills and the interest rates from credit cards, mortgages, car payments or student loans threaten to eat you alive.
The options that exist for the frugal family to weather the monetary crisis and come out the other side stronger, or at least with your credit rate intact, are narrower than with the general population. Saving money is already in our blood and we make budgets, watch our bills and live within our means.
Sometimes that means that we must be creative with our solutions.
What is debt consolidation?
A debt consolidation loan combines and replaces multiple loans. If done at the appropriate time, the consolidated loan will have a lower interest rate and be easier to manage than the loans it supplants.
Debt consolidation is best done when you have multiple big-ticket loans that have high interest rates. Consolidating the payments makes them, if not easier to pay, more convenient. One larger payment replaces several smaller ones.
Is a debt consolidation loan offer the best answer for everything?
Debt consolidation loans work well paying off bills with large interest rates, such as credit cards. It also makes repaying multiple long-term debts, such as student loans, more convenient. There are a couple of caveats with that statement.
Debt consolidation loans don’t take care of any underlying problems you may be having with your budget. Clearing off your credit card debt is great, unless you immediately turn around and start racking up more debt. Then you have credit card debt in addition to loan payments.
Advantages to a debt consolidation loan
- Lowered interest rates can save you tons of cash. Credit card debt typically has high interest rates, this can be lowered to where it is more on par with home equity loans.
- If you consolidate home loans into your debt consolidation, you may qualify to deduct the interest.
- Careful shopping could get you superior loan interest rates.
Disadvantages to consolidating your debt
- Usually, debt consolidation loans require some form of physical collateral, such as your house. This makes strict adherence to a budget a must.
- Variable rate loans can be attractive, but if the rate goes up your overall costs will increase, as well.
- Getting out of debt can last longer than it normally would. Usually, paying off debt consolidation loans will last longer than a credit card would.
A debt consolidation loan can be a lifesaver if you get in over your head, but without fiscal discipline the same problems that put you into a financial mess could return and make the situation much worse. In addition to damaging your credit rating, which will happen if you are slowly making credit card payments, the real collateral required to get consolidate your loans makes the stakes of default much higher.
Nearly everyone gets in financial trouble at some point, you want to ensure that your family comes out of it with as little damage as possible. Make sure that you can and will stick to your budget before ever taking out a debt consolidation loan.
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