If you are overwhelmed with debt you may be considering taking out a debt consolidation loan to make it easier to manage your payments and to find a lower interest rate. Not all of the consolidation loans are the same, and they may not all benefit you. Many companies that offer the consolidation loans are known for treating customers unfairly. It is important you research your loan and consider all options before you begin.
Should I Use a Home Equity Loan or Second Mortgage as a Consolidation Loan?
A home equity loan or second mortgage allows you to pull the equity out of your home and use it to pay off your debt. Often the interest rates are lower than what you can get on most other consolidation loans. However, I do not recommend using a consolidation loan to consolidate your debt. If you were to lose your job and need to miss a payment for some reason, you are putting your home at risk by missing this payment. If you do not connect the debt to your home, if you find yourself unable to make those payments, you can still keep your house. Getting out of debt more quickly is a good idea, but you do need to protect your home from being taken by creditors.
What Terms Does the Loan Have?
You want a consolidation loan with clear set of terms. The interest rate should be set and not variable. The length of the loan should be clearly spelled out and you should be able to afford the monthly payments. This can make it easier for you to manage your debt with just one payment date, and the lower interest rate will save you money. It is also nice to know that you are working with each payment to pay down your debt, not just paying mostly interest on the loan. You need to understand if the rate will go up if you are late on a payment or miss a payment. Make sure you do not transfer money over to a loan that you will pay higher interest on. Some people choose to do this by transferring money to another credit card, but if you do this, you need to stop using your credit cards and try to pay off the balance before the interest rate goes back up.
Is the Company Reputable?
No company is going to make every customer one hundred percent happy, but if you do a search for the bank’s name and complaints and you find pages and pages of angry customers, you need to rethink taking out the loan with them. Check into complaints with your Better Business Bureau too. These are two ways you can check to see if the company is a good one to work with. Some of the check cashing places will offer consolidation type loans, or you may get a letter in the mail from a place that specializes in loans like this. It is better to see if you can qualify for a consolidation loan through your bank or credit union if possible. Often the rates are better and you are working with a more respectable financial institution.
Commit to Getting Out of Debt
One of the largest dangers of debt consolidation is that you do not address the spending problems that caused you to go into debt in the first place. Often people will take out the consolidation loan, pay off their credit cards, and then start using the credit cards again. It can make it even more difficult to manage your debt and to make a difference in the way you are handling money. Imagine having your current credit card payments on top of another set of payments that are equal to it. You need to stop using your credit cards completely if you are considering this as an option to deal with your debt. Get on a written budget and pay off your debt as quickly as you can.