Quick Tips On Debt Consolidation

Debt consolidation is not such a complicated process and it can provide many advantages to those who are buried deep in debt due to excessive spending or unexpected circumstances. Here are some tips to understand debt consolidation and make the most out of it.

Debt consolidation is ideal for getting rid of that expensive credit card debt that can cost you up to 20% in terms on interests for financing unpaid balances. Credit card debt is probably the most expensive kind of debt only comparable to payday loans and cash advance loans. Thus, using debt consolidation to eliminate it is a smart thing to do.

Interest Rate And Collateral

The interest rate charged for debt consolidation loans tends to be lower than the rate charged for many other financial products, especially credit cards and pay day loans. However, this is due to the fact that most consolidation loans are secured loans. The collateral used to guarantee the loan is the equity left on your home. Consolidation loans are thus, home equity loans or second mortgages.

There are unsecured consolidation loans as well but these loans charge a significantly higher interest rate and due to the unsecured nature they are harder to qualify for. Thus, they are not so convenient for those buried in debt and are only suitable for those with small credit card debts that they want to consolidate to bring some ease to their income.

Debt To Consolidate

Not all debt is suitable for consolidation and this fact has to be taken into account when considering debt consolidation programs. If you want to consolidate your debt you need first to know the nature of your debt. Credit card debt is perfect for consolidation but subsidized student loans are not.

Basically, high interest rate debt is suitable for debt consolidation as long as there are no pre-payment penalty fees associated with it. And subsidized loans or loans with low interest rates such as federal student loans, government loan for first time home buyers, mortgage loans or home equity loans can be consolidated but nothing good can be obtained out of it.

Reducing The Monthly Payments And Saving Money

By consolidating your debt you can reduce the amount of money you pay each month in terms of debt repayments and you can save money. These two things can sometimes be done simultaneously and then, debt consolidation is undoubtedly to your advantage. However, it is not always possible to reduce the monthly payments and save money at the same time.

By extending the repayment program you can reduce the monthly payments. However, since the interests are calculated on a yearly basis, an extra year implies adding up to the overall interests and thus extending your loan repayment schedule too much may imply that you will lose the money you where saving, in the long run.

Thus, if you want low monthly payments and saving money at the same time, you need to find equilibrium between the loan length and your ability to face the monthly payments. If your monthly payments decrease due to a lower interest rate, there is no problem, but if you reduce them by extending the loan period, you are actually spending more in the long run.