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             28 March, 2024
 

    
Category:  Articles » Finances » Debt-Consolidation

 

The Cost of Debt Consolidation

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         Views: 1738
2010-10-05 08:11:44     
Article by Lyn Bell

To erase debt the use of debt consolidation sounds like the perfect solution...but is it? Let's look at the cost of debt consolidation.

Firstly let's establish what these loans are and how they can help. They enable you to redirect all of your debts through a single source often with a low-interest rate. By only having one repayment to make frees up your cash flow to better budget and get on top of what might be crippling debt. The loan has a fixed period and if you repay at a higher amount you will get rid of the loan faster.

Sounds like magic doesn't it? But what is the true cost of debt consolidation?

If you have missed payments and your credit has been damaged you are unlikely to get a lower interest rate and in fact may pay higher interest for the privilege of using a consolidation loan. Your monthly payment may be lower but you will be paying more in the long run. The cost: paying more in the long run.

Then there are the debt consolidators who say they will take care of everything. They are building their fee into the loan repayment. This could be as high as 10 or 15% of your payment. By doing it yourself and repaying the highest interest debt first with a slightly higher payment and then concentrating on the other debts you can avoid paying this high fee. The cost: high hidden costs.

Some credit card companies offer little or no interest for a set period for you to transfer your balance to them. This is like 'robbing Peter to pay Paul' and eventually you will run out of credit card providers offering this. You may then end up on a high interest credit card with nowhere to go as the interest period will only be for a limited time. This strategy is likely to affect your credit rating and is not actually helping you to control and get rid of debt. The cost: possible high interest and bad credit.

If you have a mortgage you can extend your home loan to cover other debt. As home loans are on longer term you are likely to be extending your debt term but paying a lower interest. The cost: although the interest rate is low you should be aware that by paying your loan over 15 or 30 years you can end up paying more. Also, if you default on the payment you put your home at risk.

Ask the bank for a personal loan. If you have a mortgage they may use your home as security for the personal loan. The terms on personal loan are shorter so this is a good option if the bank agrees. The cost: there is likely to be a documentation and handling fee.

From a long-term perspective using a debt consolidation loan to erase debt can be a costly option, especially if you do not select a reasonable pay-back period. These loans are not without their drawbacks and disadvantages and of course they are not without cost. Make sure it will work for you.

Lyn's website Erase Debt is dedicated to helping you to erase debt and learn the skills to become financially free. Visit and leave your ideas and comments.

Specialized in: Cost - Debt Consolidation
URL: http://www.erase-debt-now.com/
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