Some Subtle Things to Watch Out For With Debt Consolidation Loans
The debt consolidation loan sounds so promising. And a person suffering under a heavy debt burden wants to run out and get a loan right away. But a debt consolidation loan is not for everyone and some of the disadvantages might not be so obvious. Here are some subtle things to look out for when using this type of debt relief:
There is the temptation of using credit cards that are available again. This is probably the most advertised drawback to using debt consolidation to wipe out your credit card debt. It is also the most dangerous drawback. And if you are not careful you could find your self with a debt consolidation loan to pay plus renewed credit card debt.
If your house is paid for, don’t get a debt consolidation loan. There are some who are in their later years of life who have a house that is totally paid for. That basically means that the home’s value is the equity because there is no lien against it. It is up to you but converting an asset like that to pay for unsecured debts may not be wise. Yes, if you are having debt problems, a creditor can sue you and have a lien placed against your home (check the laws in your state). But the worst case is that if you sell that home, the proceeds will be used to satisfy the judgment. If you pay the judgment or get it set aside then that will no longer be a problem.
A debt consolidation loan is tough to get when someone does not have a home. There is no collateral. Debt consolidation options for persons in this situation can be getting a signature loan, using an asset like an automobile, enrolling in a debt management program, ignoring the debt, or trying a debt settlement. If an automobile is used as collateral then consider that in some cases the loan offered could be more than the automobile is worth.
A debt consolidation loan will probably preempt negotiating lower interest rates. With debt relief programs like a debt management plan, the credit counseling agency can negotiate lower interest rates with your creditors. You then pay into the debt management plan and the payment is split and disbursed among the creditors in the program. You end up paying your debts in 3 to 5 years at a reduced amount. With a debt consolidation, you have a lower payment but you pay much longer than 3 to 5 years because your credit card debt was not negotiated down.
Depending on the lender, there will more than likely be additional fees. You may have closing costs, appraisal fees, loan points, and home appraisal fees. These are all on top of the interest that you will get charged throughout the term of the loan. This all depends on the lender but you need to make sure you get all those hidden costs before you sign anything.