Debt Consolidation Loans
Debt Consolidation Loans
Americans are drowning in debt. As of the last tally, the country has accumulated a whopping $13 trillion in consumer debt. When bills become too much for household budgets to handle, individuals and families will begin to look for solutions to quickly dig themselves out of their mountain of debt. One option often considered are debt consolidation loans.
What is Debt Consolidation?
Debt consolidation loans are just one form of debt consolidation. There are many forms debt consolidation can take; loans are commonly the most heavily marketed, however. Debt consolidation is simply the reorganization and merging of debt into a single payment.
What you may not realize, though, is that the consolidation of debt by itself may do very little in moving you closer to financial freedom. Without tactful planning, you could inadvertently trade multiple debt challenges into a single, larger, and long-term problem. Some consolidation programs can slap the unsuspecting borrower with high fees, imposing late payment penalties, variable interest rates, and even pre-payment penalties.
What Are Debt Consolidation Loans?
Debt consolidation loans involve the borrowing of funds directly from a lender. The lender may be a bank, credit union, or a small financial institution. The money received from the lender is used to pay down the outstanding debts. This results in a single monthly payment to the lender.
The concept behind debt consolidation loans is to pay down debt quicker than it would be possible to manage and pay multiple credit accounts. The attraction of this form of debt consolidation is the promise of an interest rate lower than those of your current creditors. Interest rates can be fixed or variable. In most circumstances, however, the difference between the interest rates offered by debt consolidation lenders and current creditors is often negligible.
The Potential Pitfalls of Debt Consolidation Loans
Debt consolidation loans typically need to be paid back within 3 to 5 years. Although the prospect of getting out of debt years earlier than if paying off individual creditors is enticing, the tradeoff usually comes in high monthly payments.
On the surface, a single monthly payment similar to the combined multiple bills you have now may seem perfectly manageable. However, what is lost is the flexibility of how much and to whom you pay should an unexpected expense arise.
If, for example, you have a medical emergency, the luxury of making a smaller payment that month would have been lost. Instead, your payment would be considered delinquent and likely result in stiff fees and the possibility of a higher interest rate. Both outcomes that could potentially set you back months or years from achieving financial independence.
One of the biggest mistakes you can make is using a home equity loan to pay down debt. Unless you are absolutely certain you have the wherewithal to pay back a home equity loan, this strategy should be avoided. A home equity loan turns unsecured debt into secured debt. Simply put, you are putting the roof over your head at risk if you are unable to repay a home equity loan or line of credit.
Shifting Debt Is Not the Same as Solving Debt
Debt consolidation loans do nothing to reduce your outstanding debt obligations. Instead, your debt simply shifted from multiple institutions to one. Without a change in spending habits, the goal of financial freedom may never be realized. For many, lower interest rates or monthly payments may have little impact on solving their own personal debt crisis.
Consider all your debt relief options before making the irreversible decision of taking out a debt consolidation loan. To make the best decision, work with a professional debt relief company such as UmbrellaDEBT. We can help you navigate the myriad of debt solutions. Your goal should be to find a solution that promotes a healthy financial future. If you are struggling with debt and seeking ways to become debt-free, give us a call or apply online for your free no-obligation quote.