Does Debt Consolidation Make Sound Financial Sense

Created on 2008-04-10 03:32:11

How tempting are the television advertisements that tell us we can combine all of our debts into one low, low payment each month? Debt consolidation is tempting, but is it sound financial advice, well perhaps.

Consumers have debt. We all have some kind of debt, whether it is credit cards, student loans or the mortgage. The ability to repay our various debts each month can cause us great stress as our paychecks are whittled away. The advertisements for debt consolidation sound tempting with promises of one low monthly payment to replace the multitude of credit card and loan remittances.

The debt consolidation loan offers us the ability to eliminate all of our credit card debt or other debt, such as car loans and store cards. The interest rates on the unsecured debt, such as credit cards, are usually very high and the debt consolidation loan usually offers a low interest rate as incentive. However, in most cases the debt consolidation loan is secured on an asset. This asset would mostly likely be your home. In this way the debt consolidation companies can guarantee that they will get their money if you default, by foreclosing on your home.

Debt consolidation loans can have high fees. These mortgage fees are limited by each state, but often the debt consolidation loans will incur the maximum fees allowed. These can be upwards of ten percent of the loan amount. In addition the lowest interest rates will be available to those with the best credit scores. But those consumers who need the debt consolidation loan are those who’s credit is less than perfect, so the low interest rates offered may be considerably higher when the loan is offered.

The debt consolidation companies offer a product that is suitable for some consumers but there are other options that may be more suitable. If you have equity in your home then simple refinancing to take some cash out of your house to pay off other debt can be the cheapest method. Home equity loans and personal loans may be an option, but often these have already been used or not available.

Debt consolidation loans sound attractive and for some consumers the option is the answer. However, it is advisable to check the fees charged by the debt consolidation companies and the interest rates of the loan before you are in a situation where the debt consolidation loan is your last option.