Debt Consolidation Options
Particularly when times are challenging, it can be tempting to take on additional debt in order to clean up your existing problems. Present-day low interest rates can make this option even more appealing. There are four general paths consumers can take, but none are ideal and each comes with its own potential risks.
Home Equity Lines – PLUSES: Low interest rates. Money paid on interest is usually tax deductible. Once the line is established, it can be accessed quickly for a short-term or emergency solution. MINUS: Default on the loan could lead to loss of the home.
0% or Low Percentage Credit Card Offers – PLUSES: Usually the lowest cost of borrowed money, especially if the balance is paid promptly or transferred to a similar offer by another vendor. MINUSES: The rates are short-term and the offer can be dropped if a payment is late. After the “teaser term” is over, rates are generally high. Too much reliance can negatively affect credit scores. Minimum only payments guarantee a very lengthy payoff period. (several years)
Debt Consolidation Loans – PLUSES: One or few payments each month instead of a dozen or more. Possibly at an overall lower interest rate than previously. MINUSES: Overall cost could be higher than previous situation. There’s a good likelihood that the interest will be high, especially without any collateral. Term of this debt is likely to be longer than some of the individual debts.
Credit Counseling – PLUSES: Expert works with creditors to establish more manageable payment plans and possibly a reduced overall payoff. Most agencies devote time to counseling clients to help them avoid repeating the same mistakes. MINUSES: The potential for unethical or incompetent agencies, or firms that charge excessive fees for their service. If client has secured a discount and paid a smaller amount of money than the owed debt, it may negatively affect the credit score.
Bottom Line – It’s important to understand that there are no easy ways to climb out of a significant debt problem. The most important first steps – possibly with the assistance of expert help – are to exert more discipline in spending and to alter negative purchasing behavior.
Bankrate.com has more information on debt management options here.