Debt Consolidation Loans – Are They a Good Idea?

Many people are interested in obtaining a loan to consolidate their debt. Is this a good idea? Well it can be if approached from the right mindset, however it can also turn out to be a total disaster. The most common type of debt consolidation loan is a home mortgage refinance. This allows the homeowner to roll all of their high interest debt into one low monthly payment. This however, is not always the best option.

When deciding whether to do debt consolidation, you must understand that a debt consolidation loan will not solve your problem by itself. If you do not change the behavior that got you into debt in the first place then it will only be a temporary fix. The worst thing that can happen is to take out a debt consolidation loan and pay off all your credit cards, and then end up in more credit card debt 6-12 months later. If you are going to take out a debt consolidation loan, make sure you decide to make some changes in your financial behaviors.

Also, taking out a debt consolidation loan on your home can be risky. Your home is one of your largest assets, and borrowing more money against it will increase the time before you own it outright. In other words you may take a 4 year car loan and roll it into a mortgage and now you are stretching that debt out for 15 or 30 years. If you can avoid this you should.

An alternative option to debt consolidation is to get serious about your finances and just pay the debt off. Get on a budget, and attack the debt with a vengeance. You will feel much better when you have all of your debt paid off and have not increased the liability on your home. However, if your debt is overwhelming, you may need to seek a debt consolidation loan.

When doing a debt consolidation loan make sure you shop around. There are a lot of companies that offer these types of loans, but sometimes their fees can be high. Usually you will find the best deal by doing a refinance. However if you do a refinance loan, only borrow the amount you need to pay off your debt. Do not get any excess money to go on vacation or something of that nature.

Debt consolidation loans can save you a lot of money if you get serious about paying them off. If you can reduce all of your high interest credit cards by 5 or 10 percent, then you will save a lot of money on a monthly basis. The only way this works well though is to limit the terms of your debt consolidation loan. Maybe you take out a second mortgage and make it a 5 or 10 year loan. This way you will not drag out paying it off for 30 years. If you pay for 30 years you’ll end up paying way more when it’s all said and done.