Debt Free

From the plethora of radio ads for mortgages and debt consolidation loans, you'd think these were more of a basic need for people than food or housing. Of course they expound on the benefits of consolidating your debt, but since the ads are paid for by companies offering debt consolidation and consolidation loans, they tend leave out some of the less attractive parts of the debt consolidation equation. Well, I'm sure the omission is purely due to the limited time available in your average radio ad spot.

Now, I'm not saying there aren't advantages to getting a debt consolidation loan for high interest debt, mainly of the credit card variety. In fact, it can be a solid financial choice for some. However, it's also a choice that could send you straight to financial hell if you aren't careful. You're probably well aware of the benefits of these types of loans, so lets touch on the seedy underbelly of the whole debt consolidation idea.

Reason Not to Get a Debt Consolidation Loan #1
The reason you get a lower interest rate with a debt consolidation loan than you have for most credit card debt is because the lender has some collateral to ensure the security of the loan. In the world of finance, when the risk for a lender is lower, the interest rate tends to as well. In most cases the security they'll have for your loan is real estate. For 99% of the people who get such loans, that real estate is their home.

That's right, the place where you raised your kids, threw the football around, taught them to ride their bikes and have so many fond memories is the collateral for your loan. That means, should you default on it for any reason, you will lose your house. That's a pretty huge reason to think long and hard before entering into such a loan agreement. If you don't have the financial problems behind you that caused you to amass such a large pile of debt in the first place, you'll be putting yourself at major risk for living under the overpass, or at very least having your house sold out from under you to satisfy the debt. This is so vitally important bears repeating. Get your financial house in order, most importantly your spending habits, before you even remotely consider a debt consolidation loan.

Reason Not to Get a Debt Consolidation Loan #2
Even though the interest rate is, in most cases, substantially lower than you have with your credit cards, you amortize the credit card debt over a 4 or 5 year term, where the debt consolidation loan is much longer, usually 10 – 30 years. This, coupled with the lower interest rate, is why your monthly payments are so much lower. While this may greatly improve your monthly cash flow situation, it will most likely cause your total interest payments to be much larger than they would have been had you simply paid off your credit cards in the shorter term required by your credit card agreement. This supposes that you actually stop using your credit cards, however. In many cases, people simply won't do this, causing the disastrous financial side effect in reason number 1 above.

Before you consider a debt consolidation loan there are other steps you can take to help yourself financially. The first is to call all your credit card companies and negotiate lower interest rates and a better fee structure. If you aren't in default and you have a good payment history with them many will do this, especially if you threaten to take your business elsewhere. Never underestimate the power of a big stick in your negotiations. In many cases, this alone will result in dramatically reduced monthly payments. The secret is to continue making the original payments, if you can afford to Now you'll be on track to become free of that pesky credit card debt in a much more advantageous time frame.

Next, see if you can get an unsecured loan to repay the credit card debt. If you can do so at a lower interest rate than your credit card companies are charging you, you'll be ahead of the game. Even better, you will have gotten there without risking your house or landing yourself on a lengthy amortization schedule. Another benefit of this form of consolidation is that you gain the convenience of a single payment, which is far easier to manage and reduces the likelihood of a missed payment, and all the problems one can cause. In any case, you should have your credit cards on auto pay to eliminate the risk of a missed or late payment, which can send your card's interest rates skyrocketing, not to mention the fees you'll incur.

Have a great weekend, and good luck on your quest to get debt free.