Debt consolidation entails taking out one loan to pay off many others.
There are several advantages to consolidating multiple loans into one loan:
- You will often get a lower promotional interest rate if using a credit card to consolidate many other credit card balances.
- You will get the convenience and efficiency of only making one payment every month, instead of multiple payments.
- If you use an equity line on your real property in order to consolidate multiple loans, you will oftentimes be able to pay it over an extended period of time at a lower interest rate.
- Usually you will not have to pay some type of debt management company for this service as you might be able to perform the consolidation on your own.
The following describe disadvantages if consolidating loans is not handled properly:
- For example, if you use an equity line or refinance your home in order to consolidate the many unsecured debts you may have, you have effectively taken many unsecured debts, and turned them into secured debts. This means your home now acts as collateral for debts that just prior to the consolidation were unsecured. It may or may not still be the correct financial decision, but you must be informed as to the ramifications. Now, if you do not pay your equity line, foreclosure on your home is at least a possibility when it previously did not exist when the debts remained unsecured.
- Along the same lines, if you transform unsecured debt to secured debt as described above, you will no longer be permitted to discharge this unsecured debt in a Chapter 7 bankruptcy.
- If you consolidate your debts through a different credit card taking advantage of the promotional rate, when the promotional period ends, you may be in worse shape than when you started. The promotional period usually ends after twelve months. Many consumers have the goal of paying off the credit card prior to the end of the promotional period, but very few actually do. It is important to know the interest rate at the end of the promotional period. If it is much higher than the interest rate you are already paying on your unsecured debts, this may not be the best financial decision.
As with every technique in solving a debt problem, a debt consolidation loan may be right for you, and it may not. It is important to understand the pros and the cons prior to making a decision, and it is always wise to consult a Columbus Ohio debt management lawyer to review all of your options.