Wednesday, July 27, 2011

4 Important Factors to Consider Before Consolidating Your Debt

By Anya Bennett

With personal debt consolidation you can merge all your existing debts into a single monthly payment at a lower interest rate. You can use a home equity loan or a personal loan as a consolidation loan and can use it to pay off your credit card debts and other loans. Consolidating with a home equity loan can be beneficial as the interest qualifies as a tax deduction. However, the process of consolidating loans is not as easy as it sounds. You have to pay the price for curbing your monthly payments and for bringing the loan terms in your favor. Just like any other debt relief plan, personal debt consolidation has its pitfalls and should only be undertaken after a lot of contemplation. Here are 4 important factors to consider before choosing to consolidate your debt:

1) Hidden Fees and Extra CostsOften debt consolidation loans cost more than imagined and can make you fall into greater debt. The consolidation loans often carry origination fees and other hidden costs which you sometimes overlook while signing the agreement. Sometimes consolidation loans require an expensive loan insurance to protect against bankruptcy losses. In addition, by consolidating your debts you can incur a higher interest rate that can increase the overall price of the debt.

2) Pay More Over The Long RunConsolidation loans can lower your monthly payments considerably, but it can only be made possible by stretching the repayment duration. As a result by the time the loan gets actually repaid, the borrower ends up paying more than he/she currently owes.

3) Adverse Impact To Credit ScoreClosing accounts and opening consolidation loan accounts result in severe damage to one’s FICO score. The FICO score is determined on the basis of debt-to-income ratios to some extent and by closing current credit accounts and opening up a single line of credit for the consolidation loan. By doing this the consumer reduces the amount of credit available to them, which may eventually harm his/her credit score.

4) Causes Collateral DamageTo obtain a lower interest rate consolidation loan the consumer often borrows against personal collateral for security. However if the borrower defaults on payments of a consolidation loan, the lenders get the legal right to seize the collateral. As cars and homes are the only assets that some Americans possess, losing them can leave the borrower with nowhere to live and no way to get to work.

Personal debt consolidation can certainly help you minimize your outstanding debt burden but it is best for you to be prepared for the consequences.

Suze Orman's Debt Consolidation Tips:


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