Debt Consolidation Loans
How many credit cards do you have? What about a car loan? Payments on furniture? It's easy enough to borrow money, and it can be difficult keeping track of all that debt. It's easy to forget to make a payment, or to skip one with the good intentions of picking up the slack next month, and before you know it, there you are, in over your head.
When that happens, you might consider a debt consolidation loan. It's exactly what it sounds like - a loan that consolidates all your debts into one loan, with one monthly payment. It's a lot easier to deal with just one payment, and often, debt consolidation loans can help you to get your finances back to where they need to be.
How Does It Work?
Debt consolidation loans moves all of your financial obligations on to one loan. You're no longer making individual payments to different lenders once a month - just the one to the provider of your debt consolidation loan. That means, among other things, that you can close out your credit cards and not have to deal with their onerous interest fees any more if you consolidate mortgages. Make sure, though, that you know if there are any fees for early repayment, because they'll also have to be factored into the amount of your new loan.
Secured or Unsecured?
Generally speaking, debt consolidation loans are of the unsecured variety. This means that you're not providing collateral - your house, for instance - and that the lender can't seize your assets if you can't keep up with your payments. Don't take this as meaning that you don't have to make regular payments, though - if you default, the lender can still take you to court to recover the money that they've loaned you to consolidate mortgages.
A secured loan does require collateral, usually your property. If you default, you could risk losing your home.
Advantages and Disadvantages?
As is the case with practically any mortgage, debt consolidation loans have its pros and cons. The biggest advantage is that all of your debts are locked into one interest rate, usually better than the cumulative total of all the other little loans and credit card debts you've been carrying. Managing your debt is a good deal more straightforward, and generally less expensive. The down side of consolidate mortgages is that you may end up paying more interest on some of your debt - for instance, if you could move your credit card balances to a card that offered an introductory period of 0% over a certain length of time, and you were able to pay off all or most of that debt using this method, you could be much better off than you would with debt consolidation loans.
Also, paying off your debt consolidation loans early might seem like a good idea, but sometimes there are penalties for doing so. However, the longer the term, the more interest you'll end up paying. If you can pay it off really early, that's great - you're probably better off just eating the fees and getting out from under, since you'll save more by not continuing to pay interest. If you're nearing the end of the term, though, and you happen to come into some cash, don't immediately say "Great, now I can get rid of this loan!" Find out what you'll have to pay in fees, and weigh that against what you'll pay in interest if you let the loan run to the end of its term.
Debt consolidation loans can be a great way of reducing your interest rate and gathering all your debt under one easy umbrella. Keep in mind, though, that it's easier to borrow money than it is to pay it back, so if you're planning to consolidate mortgages, remember that you now have a significant obligation to one lender, and avoid falling into the trap of incurring more small debt.