Debt Consolidation Pros and Cons – Debt consolidation is an important step to paying off your credit cards and other loans and we’ll go through the pros and cons to find out if it’s the best financial choice for you.
There are plenty of options to take when paying off debt and a popular one would be to cut up your credit cards and work out a payment arrangement directly with the bank.
Let’s go through the other options, beginning with balance transfers. Often, credit card offers will arrive in the mail, advertising extremely low rates if you use that card to transfer the balances from your other cards. This can be an effective tool for debt consolidation if used wisely.
These offers usually come with a very low rate, such as 1.9 percent for a set period. All of your credit card debt can be consolidated onto one card for an easy payment. It is probably the best interest rate will ever get.
However, the initial teaser rate may not actually be as low as advertised if you are not the best-qualified borrower. There can be a balance transfer fee for your debt consolidation. The interest rate can jump if you are late once.
For example, a 1.9 percent interest rate can jump to 21.9 percent if you are late even one time.
You can quickly run up more debt on your old cards that now have zero balances. Then you will have several cards with large balances, which translates into large interest payments.
Another option for debt consolidation is to use your home equity in the form of cash-out refinancing. This involves refinancing your mortgage to one with a higher principal, so that you can access your home equity.
Since the loan is your mortgage, it will have a much lower interest rate than you had on your credit cards. The interest is likely to be tax deductible. Your monthly debt obligations will be less.
Because your credit card debt is now consolidated in your mortgage, you pay much less in interest, which is a cost savings. Also, depending on the mortgage that you get, you may be able to stretch out your term so your monthly mortgage payments do not increase.
However, this can cause problems if the money isn’t paid. Don’t forget that the loan is secured by your home, so if you default, you can lose your house. The home equity that you use for debt consolidation is no longer available to you if you sell the home.