Pros and cons of debt consolidation
Debt consolidation isn’t new; banks have been helping people for years to consolidate their debts with personal loans and home equity loans.
Almost everyone has some kind of debt, whether it is a car loan, a credit card balance, medical bills or a student loan. To make it easier for people to manage their debts, lending institutions came up with a solution called debt consolidation.
Debt consolidation is a term that gets thrown around quite a lot. Historically, debt consolidation has been associated with individuals in dire financial straights who need assistance to get out of it. However, some people turn to debt consolidation as a way to simplify their monthly bill paying; they’d rather write one check a month instead of six.
Credit card companies jumped on the debt consolidation bandwagon about 10 years ago. They created an easy way for current credit card holders to use their existing credit line to pay off other higher interest debts. These companies offered incentives such as low interest rates on balance transfers, higher credit lines to accommodate a large transfer, and easy transfer options such as phone transfers or balance transfer checks. It’s easy to move your debt around; just be sure to read the fine print – often the low interest rate given with a balance transfer only lasts for a few months.
Debt consolidation loans done through a bank offer benefits that aren’t available with credit card balance transfers. Homeowners can borrow money with a home equity loan. A home equity loan can provide you with a simple interest, fixed rate second mortgage, which can save up to three times more than paying on credit cards with interest compounded daily. Home equity loans may also offer tax benefits. With a home equity loan, you don’t have to use the entire loan for debt consolidation; you can use it for anything.
There are still great debt consolidation options for non-homeowners. Most lending institutions offer personal loans or unsecured lines of credit. These loans have competitive fixed rates and can be used to pay for anything. Personal loans are unsecured, which means there is no requirement of collateral if the borrower has good credit.
You don’t have to be in a desperate situation to consolidate your debt. Just wanting to simplify your monthly bill paying is enough. Debt consolidation is for everyone.