Can a Consolidation Loan Eliminate Debt?
Debtors often use a consolidation loan as a method used to handle excessive debt. For example, they will take out a home equity loan to consolidate credit card debt because of the tax advantages associated with equity loans. Home equity loans reduce the monthly payments, because borrowers can pay only the monthly interest to stay current.
Disadvantages of a Consolidation Loan
While a consolidation loan may seem to be an effective method for paying off bills, these loans can also be dangerous. That’s because debtors can be tempted to incur charges on the credit cards that were paid off with the loan. The debt mounts, and then before they know it, they can be in serious financial trouble again. Getting a second credit consolidation loan is unlikely, because at this point the debtor’s credit rating is too low to qualify.
Another disadvantage is that although the interest rate on a consolidation loan usually is less than other types of credit, the extended loan period results in more finance charges over the life of the loan. The result is an overall higher total balance paid.
In addition, a consolidation loan requires debtors to put up collateral, and this limits their future borrowing power and could place their property at risk if they can’t make their monthly payments. Eventually their homes could be foreclosed or they may need to seek credit counseling for bankruptcy (link to: “credit counseling bankruptcy” page) to decide whether to file. Bankruptcy could further damage their credit records, for up to 10 years.
The best way to consolidate debt is not to incur new debt. There is a way to do this by working with an experienced credit counselor at a legitimate non-profit credit counseling agency.
A Debt Management Program vs. a Consolidation Loan
Unlike a consolidation loan, a debt management program allows you to consolidate your debt without borrowing more money. That’s where American Consumer Credit Counseling (ACCC) can help. With our debt management program, we work with your creditors to consolidate your credit. You send one convenient monthly payment to us, and we distribute it among your creditors. We also may be able to get your creditors to reduce interest rates and waive fees and penalties that you may have incurred.
Call us today and talk to one of our experienced, trained credit counselors about tailoring a debt management plan that will help you with consolidating bills and start you on the journey to financial freedom.