I need to consolidate my debts, is it advisable to get a consolidation loan?

Debt consolidation loans are like penicillin. For some people, they can work extremely well, and solve all kinds of problems. But for others, debt consolidation loans can cause some catastrophic side effects. Other kinds of debt management could solve your problems instead, so make sure you understand exactly what a debt consolidation loan is, and what it isn't.

If you have a bunch of credit cards an unsecured personal loans, and are either having trouble paying all of them, or feel that the total payments you are making are too high, then you have the opportunity to take out one secured loan, large enough to pay off all of your other debts, but over a longer period than those debts, so your total payments are lower each month. Remember though that this isn't just a loan that pays off your other bills, it is also a second mortgage on your home.

This is significant. Your debt consolidation loan is usually to cover for a financial situation which is negative. But you are paying off a debt by taking on a debt, and the situation could get worse. Now you have a secured loan, worse MEANS worse. A secured loan is taken out with collateral put at risk. Should you default on the repayments of a secured loan, the collateral could be repossessed. So, even if you are paying off your mortgage comfortably, if you can't pay off your secured debt consolidation loan then your home could be foreclosed upon.

You must remember that this is not philanthropy. The companies who advertise debt consolidation loans are not charities. They will tell you that the main selling point of these products is the reduced monthly payments. They will use language such as "debt restructuring" but it's no different really. The other "advantage" that they will advertise is that they can make an additional lump sum available to you on top of paying off your debts. Bear in mind that the more money lent to you, the more money they can make as the more money you will have to pay back.

Think about why you are in the position that you are in, needing this debt consolidation loan. Maybe, despite your best intentions, you couldn't make those large credit card payments this month, but you could make the monthly payments on a debt consolidation loan. If you go down the debt consolidation route then you must be absolutely sure that you would still be able to make payments even though if your employment, health or financial situation changes unexpectedly. If you can't, then you could lose your home, and is it worth making that bet? Only if you can win it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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