Should you consider a Debt Consolidation Loan?

High interest charges on consumer debt can leave you feeling as if you are treading water but recognize that help is available and it will allow you to breath more easily. One of the tools that is becoming more popular with those burdened with debt is the idea of debt consolidation.

Debt consolidation is simply combining all smaller debts into one larger loan under one account. This offers the payer the ability to pay just one payment each month as well as lower the overall interest rates by having just one account. You may want to cash out some equity to consolidate other debt. Is this a good idea? If you have the equity in your home to make it work, paying off other debt with higher interest rates than the interest rate on your mortgage, for example: credit cards, home equity loans, car loans, some student loans, often means you can save hundreds if not thousands of dollars per month. Debt consolidation can also help to reduce the overall time that it will take to pay off the loans.

When is a good time to consider a consolidation loan? The truth is that these kinds of plans are good for people that have a decent credit history of paying their debts on time as well as people that are holding a number of balances that need to be paid. In short, those with more to pay off can benefit tremendously from this kind of system. If you find that you’re struggling to pay off the minimum balances, or something has occurred that will prevent you from paying these balances, you will want to look into debt consolidation. Not only will this reduce the overall payment but it could also put you on the path to financial freedom.

The most common way to consolidate debt is to use the equity in your home. You may consider refinancing your first mortgage or simply getting a home equity line of credit. In either case, make sure that you are working with a licensed mortgage professional who will present an overall payment for the debts that you owe, as well as a before and after analysis. For a consolidation to be successful you should be lowering your overall payments, interest rate and should not incur fees greater than the equivalent of two years of payment savings. For example: If you are able to consolidate all of your debt and reduce your total monthly payments by $500 then a good rule of thumb would be to not have total consolidation fees greater than $12,000 ($500 x 24 months).

The only downfall to this kind of debt payoff scenario is that you may be extending the time in which to pay off your loans which could result in more interest being charged in the long run. For example, if you are consolidating a six year car loan by refinancing it into a 30 year home loan you will undoubtedly be paying much more for the car then if you had kept the original car loan. Therefore the proper strategy would be to consolidate the car loan with the home mortgage but then take the monthly payment savings and apply that to the principle of the loan thus achieving both a payment savings and a term reduction.

Debt consolidation is a serious financial decision that should be made only after you have carefully analyzed the total outcome of your decision. Working with a Certified Mortgage Planner will ensure that you are making the right financial choice.

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