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Facts To Consider Before Consolidating Your Debts
When you have a lot of payments due every month, it can be financially and emotionally taxing. Taking out a larger loan to pay off all your existing creditors is called debt consolidation. Debt consolidation loans allow you to repay your debts over a longer period of time at a low rate of interest. Typically, you have to put up an object of value, like a vehicle or house, to secure the loan.
The benefits of choosing a debt consolidation service are fairly obvious. You won’t have as many creditors trying to get payments. You will have just one company to pay rather than many. You won’t have to spend nearly as much time working out how many payments to make each month. With one low-interest loan, you will find it far easier to focus your monthly income on paying off your debt.
When you enter a debt consolidation agreement, you are committing to a long-term loan. Even though you will get a low interest rate, you will be paying it back for a longer period of time, which means you will wind up paying quite a bit more in interest than you would have if you hadn’t consolidated your debts.
This kind of debt restructuring is only possible when you have sufficient security to place as collateral. Most of the time, people put their houses up to secure the loan. Debt consolidation replaces all your unsecured variable-term loans with a single long-term loan against a collateral. This is one of the most important points to be considered, as the creditor can auction off the collateral in the case of payment defaults.
Consolidating your debts can help you begin to clean up bad credit, because rather than having many loans out in your name, you will have just one. When you go to get another loan, you are more likely to be approved if you have only one outstanding loan as opposed to several. It should be noted, however, that debt consolidation may damage ratings in the short term.
Interest on credit cards and other unsecured debts is not tax deductible. If, however, you consolidate your debts and secure the new loan with your home, you can usually deduct the interest you pay on that loan because it is now considered a mortgage loan. This is one of the most important advantages of a debt consolidation, provided the cons can be countered or at least reduced in intensity.
Though there are those who fail financially because of a bad economy or something else outside of their control, most turn to debt consolidation because they were foolish with their money. Debt consolidating may not be a help to people who are prone to living a life beyond their means. If you consolidate debts, your overall stress level will probably lower and you may even obtain a false sense of security in your financial status.
It may also result in an improved credit rating and more options for obtaining credit. Because your house is set up as collateral and you run the risk of losing it, excessive credit and spendthrift habits will have you in a worse state than you were in before, unless you seek financial education or credit counseling.
You’ll need to become wiser in your spending ways if your financial situation needs debt consolidation. So that you don’t repeat the same mistakes again, take a class that will make you aware of your past mistakes. Such a class will also guide you toward setting up a budget and making responsible spending choices in the future.
In short, debt consolidation can either be a boon or a bane depending on your commitment and ability to manage the loan properly. Debt consolidation can work for you as long as you control your spending impulses and refrain from taking on more debt.