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Loan Consolidation
It is unfortunate that most consumers hear the term “loan consolidation” in a somewhat negative way, usually in discussions of how to stave off bankruptcy or get out of debt. It is good for those purposes, of course, but it is also a powerful tool for long-term financial planning.
Loan consolidation is, simply put, a process by which a number of different loans are “consolidated” into a single, new loan. The advantages are obvious, and even a small drop in interest rates can make loan consolidation attractive to people with good credit or bad.
For debt relief
For example, consumers who have gotten themselves into trouble with credit cards, but have not yet missed payments or exceeded their limits, can benefit greatly from a savvy loan consolidation. Since their credit ratings are still good, they can qualify for a wider variety of loans with attractive interest rates. Combining all the small accounts into one, with reduced interest, can have a major impact on the household budget.
The calculations are not hard to do. (See the article on Loan Calculator for more help.) Consolidating numerous credit card loans is perhaps the most obvious type of positive loan consolidation, and consumers who can access their home equity through a low-interest loan will be the biggest winners. The precise amounts that you can save will be dependent on your credit rating, the source of the loan consolidation funds and the interest rate of the new loan.
For survival
There are also consumers whose credit ratings are starting to take a tumble because of late payments, over-limit accounts and interruptions in employment. If they don’t get some kind of relief they may have to consider bankruptcy. If you are facing this kind of situation, loan consolidation is one of the first remedial steps that most credit counselors and financial planners will suggest.
There are some additional considerations when loan consolidation is done for debt relief. First of all, the consolidated loan will not be an accessible credit line, it will be structured as a loan. Therefore, you may wish to exclude a credit card or two from the consolidation process so that you have a source of emergency funds. Of course, you should choose the lowest interest rate card(s) you have, preferably with a fair amount of remaining credit.
Balance transfer strategy
There is another, somewhat more straightforward and simple way to consolidate credit card balances. If you qualify for a new credit line with a 0% introductory period (at least six months, if not a year), then you can transfer the balance of your highest interest credit cards to the new account. If your calculations show that you can pay off the amount during the zero-interest period, you have accomplished a loan consolidation on your own, and a good one.
Exercise caution, however, whatever approach you take. Be honest and realistic with yourself about your ability to discharge the new, consolidated loan. If you cannot guarantee that you can handle the new payment, then do not approach your loan consolidation in this manner. If you cannot figure out the alternatives, and you are getting at all confused about the matter, by all means seek out a credit counselor or financial planner. Loan consolidation is a “way out” – out of debt, out of bad habits – and you need to be wise about it, as you should be with all your financial decisions.
Topics: Debt Consolidation |
