It sounds so appealing to have just one debt to pay. But is it the solution you think it is?
Perhaps not. It depends on the conditions of the loan, how you behave with your credit after your debts are consolidated and other factors.
Sometimes you can consolidate your loans through a second mortgage. Be aware that this means your home is at stake should you have to default. This may not be the best option for you.
When considering a debt consolidation loan, be aware of what it will cost you. Between the fees charged by the company helping you get the loan and the interest on the loan, you may be paying more than you would have otherwise. The interest can be higher than you were paying on your individual loans.
Another aspect to consider is the impact on your credit rating. It may not help; in fact, it may damage your credit rating. A part of this is due to your credit rating being partially determined by how long you have had the particular credit account.
You should always watch out for fees in advance of getting a loan or promises that you WILL get a loan. No one can guarantee that.
A debt consolidation loan is appropriate if you will have lower interest rates along with your monthly payments. Know how you will handle the loan if financial disaster strikes, so you won't lose your home.
Finally, once you have the loan, remember to leave your credit cards alone! Your problems are not over, and it is not time to celebrate by spending money. Start budgeting your money more carefully and live within your means. It will relieve you of a lot of stress from having more bills than you can pay.
First, get everything in writing. Verbal promises aren't good enough. If you're applying for one online, print everything out.
Consider whether you want to take out the money against your home or not. This is the most common kind of loan, and other types may have high interest rates. Try not to borrow more than your home is worth, as if you default you will not only lose your home but still owe money.
If borrowing against your home, you may want to consider getting a line of credit rather than a loan. This allows you to borrow only the amount you need, as you need it. You need to have the discipline to not abuse this, of course, or find yourself in worse financial straits.
Watch out for balloon payments. This is sometimes a tradeoff for low payments earlier on, but leaves you with a huge amount to pay all at once later.
On a home equity loan, you should expect to pay between 1 and 3% of the loan amount in points and fees. If you are paying more, find out why. You may be better off with another lender.
You may decide to go through a debt consolidation service rather than getting a loan. These are companies which make a plan to help you get out of debt over a period of time, say 48 months in many cases. The debt consolidation plans can help you work with creditors to reduce interest rates or late payment fees, which is certainly an option you can try on your own first. You then send the service your monthly payments, which they distribute to creditors. You'll pay the service a fee for this, so make sure the fee is less than you would be paying in interest.
Another benefit is that once you are in such a program, your debtors will not contact you any more. They will have to go through your debt counselor.
You must send in all your payments with a money order to ensure that you do not bounce a check. This is for your protection, as if you bounced a check with this program, your interest rates would soar back up to their previous heights or more.
Watch out for the fees. Make sure you understand which fees are refundable and under what circumstances. You may find yourself paying $100s in fees if you are not careful, as well as a percentage of what you pay your creditors.
You may have heard that debt consolidation can hurt your credit rating, and it is still possible for it to do so. However, credit counseling can be removed from your credit rating once it is completed, so it is not so damaging as it once was. Keep an eye on your credit rating after you have gone through debt consolidation to ensure that your rating does not drop inappropriately.
This, of course, applies only to the legitimate companies. If you're being charged outrageous interest rates and fees, you are not being helped.
You will probably work with one of these companies for 48 months or longer. You will still want to review your statements to be certain that the payments you have made are applied in a timely fashion. You will also want to make certain that promised interest and fee reductions are applied to your account.
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