Debt consolidation is the replacement of
several different loans (like those for college fees, medical expenses or
credit cards) with a larger, single loan. There are many ways to do it; for
example, you could transfer them all to a credit card with a lower interest
rate, take out a home equity loan or obtain a loan specifically designed for
debt consolidation.
The main advantages of consolidating are
that your new loan will usually have a lower monthly payment, lower interest
rate and longer repayment period than your existing loans, and you will only
have one monthly payment to make instead of many.
The potential disadvantages of
consolidation spring from the type and conditions of the consolidation loan
you take out. For example, if you use a home equity loan to consolidate your
debts you are swapping unsecured debt for secured debt and risk losing your
home if you default on payments. In addition, if the term of your
consolidation loan is longer than the terms of your existing loans you may
end up paying more total interest, even if therate is lower. Lastly, it will take you
longer to pay off your debt.
Before you decide to consolidate it is
essential to be sure that a) your new monthly payment will be less than the
sum of the monthly payments on your individual loans; b) the interest rate
on the consolidation loan is lower than the average of the interest rates on
your old loans; c) that if the new loan does take longer to pay off, that
overall you will be better off in the long-run.
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Debt consolidation is the replacement of
several different loans (like those for college fees, medical expenses or
credit cards) with a larger, single loan. There are many ways to do it; for
example, you could transfer them all to a credit card with a lower interest
rate, take out a home equity loan or obtain a loan specifically designed for
debt consolidation.
