Debt Consolidation - The Benefits and Down Falls

A debt consolidation loan is used to take all of the separate debt a person may have and combine that debt into one, lower combined payment. A debt consolidation loan will generally be used to reduce debt to a more manageable level. The new payment will be lower than the sum of the previous payments and is also tax deductible where those previous balances may not have been.

For example if a person had three credit cards with balances of $2000 each and monthly payments totaling $200, a car payment with a balance of $18000 and a payment of $450 and a second mortgage with a balance of $32000 and a payment of $550. That person could combine the total debt of $56000 and turn that into a payment of $469 for 20 years at 8%. This would show a monthly savings of $731 on a monthly basis. In addition the interest paid would be tax deductible for even more savings.

Debt consolidation is very popular as people tend to over extend. Last year the average amount of credit card debt held by Americans was over $8000. In addition the interest rate on a debt consolidation loan will usually be much less than that on those debts that are being paid off.

Many different items can be paid off by a debt consolidation loan: Credit cards, auto loans, other mortgage loans, furniture financing, student loan and other personal loans. The list is endless. The beneficial part of the equation is that combined sum of payments will be much more manageable.

A debt consolidation loan also gives a home owner a “fresh start.” As bills add up, it becomes difficult to manage all the different debts at the same time. It is easy to write one check at the end of the month, and much more difficult to write 30 checks. By consolidating, it reduces the chance of delinquent payments, and allows a better scope of cash flow.

The biggest negative of debt consolidation is the opening up of the previous debt. Many consumers consolidate their debt and then use their now available credit for more purchases. This new debt, in addition to the debt consolidated, becomes too much to bear. One must be careful when consolidating, and make a personal pledge, not to obtain new debt once the consolidation loan is in place.

The moral to this story, is that debt consolidation can reap amazing benefits when utilized properly. When utilized to add additional debt load, it can be very detrimental.