Five Questions You Need To Ask About Debt Consolidation Loans

five questions to ask about debt consolidationDebt consolidation loan is really pretty simple. It replaces countless annoying monthly bills that are all due on different days of the month with a single, annoying but-far-less-time-intensive monthly bill.

Heavily advertised as the perfect solution for people struggling to pay bills on time, loan consolidation should never be an off-the-cuff decision.  Although there are a lot of times when debt consolidation makes sense, there are pluses and minuses that should be considered before you make a decision that could have long-term financial consequences.

Here’s a candid look at what you need to be aware of before deciding that a consolidation loan is the right solution for you.

Will it pay off all your debts?
If not, you may be just changing around the amount you owe on some debt without really accomplishing the goal of simplifying your monthly payments.

Will it take longer to pay off?
A lower payment can mean a longer term. That isn’t necessarily a bad thing, but be aware of how long it will take to pay off the loan. Also, check how much you’ll be paying in interest compared to how much interest you’ll be paying if you leave your current debt alone.

Will you still be able to use your credit cards or other revolving debt?
If so, you may find yourself strapped with the original amount you owed on your credit cards within a few months – on top of the debt consolidation loan you took out to resolve the problem.

Are there fees involved?
Find out what they are so that you can see if it still makes sense to go ahead with the loan when you take those fees into account.

Will your home be used as collateral?
Many debt consolidation companies use a regular salesperson and call him or her a “consultant.” Don’t take advice from these people. Ask questions, do research, and find out what the facts are before you sign anything. Using your home as collateral may make it difficult or impossible to refinance or sell your home should the need arise.

Before you decide that a debt consolidation loan is right for you, be sure to do your homework — including reviewing your debt situation with a certified financial professional.

Most credit unions and banks will be happy to work with you to run the numbers and make sure that loan consolidation makes sense for your financial situation.  Or do the math yourself.  There are several good debt consolidation calculators available on the web, including this one from Bankrate.com.

Just remember: be especially cautious with consolidation options that charge heavy fees or require you to use a home as collateral.  There’s serious downside potential to that kind of an offer, so getting a second opinion is a solid plan.

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