Is Debt Consolidation The Right Choice For You?

Thu, May 27, 2010

Financial Advice

Ads for debt consolidation are omnipresent on television, radio and the Internet. What exactly is debt consolidation? Many of us have a multiplicity of bills — store cards, credit cards, car payment, medical bills, etc. Debt Consolidation aims to combine all of your outstanding debts into one new single debt — ideally with a lower aggregate interest rate and lower monthly payment. Of course, the debt consolidation company arranging this transaction charges a fee, so that expense also needs to be calculated into the equation. Interest rates on many types of debts, including credit cards and store cards, is quite high. Consequently, debt consolidation can lower the effective interest rates incurred by many consumers.

Most often, debt consolidation requires that you own your own home with equity in it, but there are some debt consolidation services that will attempt to work with those who are not homeowners. For those who own their home, debt consolidation most often entails combining all of your bills into a new second mortgage. Seeing that mortgage interest rates are almost always lower than credit cards, this explains how debt consolidation can serve to lower the amount of total interest you are paying each month. However, there are some careful considerations to make prior to engaging in debt consolidation — especially if you are using your home as collateral.

By switching unsecured debt to a new loan secured against your home, you are putting your residence at risk should you default on the new debt. This is obviously a ramification which warrants careful analysis prior to signing on the dotted line for any debt consolidation deal. For many, however, debt consolidation can be the smartest financial move available to reduce the amount of interest paid to your creditors each month.

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