subject: When Is A Good Time For Debt Consolidation? [print this page] Debt consolidation is the process of taking out one financial product (such as a loan) to pay off other existing debts. This article will look at why people go for this, how it can be done, and what the benefits of it are.
The new debt will usually have a lower rate of interest than the existing debts. An example of this may be an individual taking out a $1,000 personal loan at 10% APR, to pay off three of their existing credit cards that each charge 20% APR and have a combined debt of $1,000 between them.
Although the initial amount of debt (in this case $1,000) is not being changed, it means that the in the long term the total debt will be reduced, as the person will be paying less interest over the period of time in which it takes to pay the total amount off.
The new debt can come in a number of guises. It could be a credit card that carries a higher credit limit and/or a lower APR than a customers' existing credit card(s), an unsecured personal loan, or even a secured loan - such as a mortgage.
A secured loan means that an asset, such as a house, is being used as security against the loan. As the credit company are being offered some form of security against payment of the loan, they in turn can offer a reduced rate of interest (APR) to the consumer, as they are carrying a lower level of risk against repayment not being made.
Another reason someone may do this is convenience. Having a single debt means a person only has one due date, as opposed to two, three, four or more smaller debts that each require a payment by a certain, different date. When having to make many payments it is easy to miss a date and be hit with a late payment fee as a result.
The final key reason why someone may look at debt consolidation is if they have got themselves into financial problems. If they are making several payments every month, the total amount of these payments could be adding up to more than they can comfortably afford. Debt consolidation will allow them to reduce the monthly amount that they are paying, giving them some breathing space in their budget.
There are important things that you should consider before deciding to consolidate your debt, as it is not always a good idea. If you consolidate unsecured debt into secured debt, or any debt over a longer period of time, although you will be making a lower monthly payment, the total amount that you will be repaying can turn out to be significantly greater, due to the extended period of the loan.
Overall, debt consolidation can be an extremely good idea, but only if done in the correct manner and for the right reasons. Make sure you search for a consolidation loan that will offer you a lower rate of APR than you are currently paying, and that you will not be paying considerably more in the long term.
by: William Trustey
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