Debt Consolidation: Too Much of a Good Thing?
When you're strapped for cash, debt consolidation may sound as refreshing as an iced cold glass of water on a hot day. The irony is that debt consolidation loans require you to take on more debt, the very thing you already have too much of.
"Never go to excess, but let moderation be your guide." The words of Cicero, the ancient Roman philosopher, touch on the idea that too much of anything can cause big problems. But when you have too much debt, debt consolidators tell you to add more. Is this a real solution, or are you just asking for trouble? Learn about the most common forms of debt consolidation and decide for yourself.
Balance transfer offers with low introductory rates
Moving money from one credit card to another only makes sense if the introductory rate helps you pay off the balance entirely before the rate goes up again. Calculate the cost of any transaction fees when considering this option.
Home equity loans
If you have equity in your home, on excellent option that you have is to exchange several credit card debt payments for one low, fixed-rate home equity loan payment. There are, however, two noteworthy disadvantages to adopting this strategy. First, the formerly unsecured debt would be secured by your home. Second, your credit cards would have a zero balance, which can be an irresistible temptation for heavy spenders.
Unsecured debt consolidation loan
A personal unsecured debt consolidation loan works in the same was as a home equity loan, except there's no home for collateral. Conventional lenders are reluctant to provide unsecured consolidation debt; if and when you find a lender, expect the interest rate to be high. Review the terms very carefully and be on the lookout for extra fees.
Credit counseling is the only solution covered in this article that involves more than shifting debt from one place to another. First, a reputable credit counselor will help you address the spending and budget issues that caused the debt problem in the first place. Then, he'll negotiate with creditors on your behalf to reduce your obligations. Negotiated reductions should ease some of your cash flow pressure, but will also negatively impact your credit score.
No matter which option you like, take Cicero's words to heart and live in moderation. It's the only way to ensure that your consolidation strategy doesn't leave you with too much debt.