Debt Consolidation

Debt consolidation is, simply, the consolidation of various sorts of debt into one loan. Beyond the obvious convenience of a single payment, debt consolidation can offer lower monthly payments because many cards have minimum payments independent of percentage of balance, and, of course, consolidation allows the borrower extended time to repay the debts. Upon a closer look, though, debt consolidation actually may increase the total debt paid once you take into account the compound interest accrued by increasing the length of repayment time.

With current interest rates spiraling for borrowers with sub-par credit after the recent mortgage lender failures, many debt consolidation loans are now unavailable to those with less than perfect credit. Most lenders will still offer equity loans to homeowners, but, as with all mortgages, this runs a tremendous risk – especially as home values nationwide continue to fall. Considering most Americans view their home as their primary asset, adding personal debt to what’s already owed against their home could be disastrous. Debt consolidation, provided the borrower qualifies for the loan and finds a manageable interest rate, may be a worthwhile option for individuals with perfect credit and low ratios of debt to gross income who intend to repay the funds quickly. Even in the best scenarios, though, the lenders will charge a percentage of each transaction to be paid in cash or added to the existing balance.

Compared to debt settlement or other methods of immediate repayment, debt consolidation could be considered a form of artificially extending the period in which debts must be repaid – to potentially far higher costs.