Debt consolidation loans have existed for a long, long time. People have spent more than they earn probably since the development of societies. The rise of store credit cards followed by cards like MasterCard and VISA have driven the popularity of these loans during the past few decades. They are marketed as a way to reduce interest and service the debt as one item with one payment.
Hopefully, the single payment is somewhat less than the combined payments.
You must decide if this type of loan will be good for you before reaching out to secure one. By answering a series of questions, you should be able to identify whether a loan consolidation loan will work for you.
Why do you need or want to consolidate your debt?
You need to evaluate your household budget to see what other options may exist. You may find that by adjusting your lifestyle, you will be able to retire this debt just as easily without the consolidation loan. Many people get this type of loan because their spending habits are out of control. They see this as a way to keep fueling these bad spending habits. If this is your case, you may want to seek professional credit counseling before you consider a loan that may make things worse instead of better.
Will a consolidation loan put your home at risk?
Almost all debt consolidation loans are a way to trade unsecured debt for secured debt. This is why the interest rate can be so much less. Unfortunately, a consolidation loan is often a second or third mortgage on your home. Not paying this debt will not result in dealing with annoying debt collectors. It will result in foreclosure on your home, and your family being evicted. Is this a risk that you can live with?
What is your plan for any improved cash flow realized from the new loan?
It is possible to net hundreds of dollars in monthly savings for your debt service. This is enough to give some stressed families the feeling of breathing room. If you plan to let this savings disappear into your entertainment or spending money pool a consolidation loan is not likely to benefit you very much. If the extra cash is to be saved or used to retire other debt, you will be more apt to benefit from this loan.
Will you be able to resist continuing to charge on your credit accounts?
It is critical that you leave your credit cards empty and unused after your debt consolidation. Otherwise in a couple of years, you will have excessive credit card debt again. Sadly, you will still be paying on the consolidation loan, too. Because of questionable skills with spending and charging, your next consolidation loan will be larger and probably have higher interest if you enough equity in your home to secure one. This is a vicious cycle that it is best to avoid.
Can you comfortably service the new loan until it is retired?
To answer this question, look at your budget. If you do not use one, create one now. Do you have enough income for this loan to make a difference in your financial comfort level? If this answer is no, you should rethink putting your house at risk. You should never incur debt that you cannot easily service.
If you are married, do you both agree on this path to a successful financial future?
Household budgets require both parties to participate in order to work. If your credit issues have been created by the bad spending practices of mostly one spouse, you need to agree to fix this before proceeding. One person cannot make this work if the other partner is sabotaging it by rampant charging on credit cards. This should be a time for that painful financial talk that every couple needs to have.