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Debt Consolidation: What You Should Know

April 02, 2007 By Jane Hynes, Princeton Online

Many people owe too much money on their credit cards. Credit card debt is a serious situation in the United States where the average balance is nearly $3000. Debt consolidation companies suggest solutions by offering a single loan to replace all of the small ones. For some, that can work, but there are four things that you should know before getting into a debt consolidation plan.

1. Interest rates – Loans that replaces a credit card loan are usually a good idea because credit card interest rates often exceed 20% per year. Debt consolidation loans usually have more affordable interest rates. Shop around in order to make sure that you get the best interest rate available.

2. Length of the loan – The main selling point of debt consolidation loans is that they lower your payments. Consolidation loans do lower payments, but many companies fail to point out that this is sometimes accomplished by dragging out the duration of the loan. If you are lowering your payments by increasing a loan from seven years to fifteen, you may not be saving money in the long run.

3. Keep Making Those Payments - Make sure that if you consolidate your debt that you can actually repay the loan. In many cases, debt consolidation loans are secured, often my real estate. If you have pledged your house as collateral for your debt consolidation loan, you are now risking losing your residence if you fail to pay.

4. Be Careful – By consolidating your debt, you are, in most cases, clearing your credit card balances and for some people, the temptation to start using them again will be great. Using credit cards requires discipline, and if you fail to exercise that, you could find yourself having a lot of credit card debt and a consolidation loan.

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