Debt consolidation is the bundling of many loans into one loan. This is done in order to get a lower interest rate, to get a fixed interest rate, to get a smaller monthly payment or merely for the convenience of just having one loan. Since each person's financial situation is unique, there is no hard and fast rule about the best way to consolidate debt or even if debt consolidation is a good idea.
However, there are several rules that apply to everyone that should be considered before doing any debt consolidation. Do the math. If you have $10,000 of debt on three credit cards at 25% interest it is a good idea if you can transfer that debt to one credit card at 18% interest. However, check to see if there are fees attached to this balance transfer or if the new credit card has a large annual fee. You should verify that you are actually saving money in this case. If the new interest rate is for a short time then you should verify that you will still be saving money when the interest rate goes back up. Read the fine print.
Paying off credit card debt by taking out a home equity loan usually sounds like a good idea due to the lower interest rate and smaller monthly payments. Some loans have points or loan origination fees added to the loans that can mean a substantial increase in your total debt. Some loans have pre-payment penalties, variable interest rates or balloon payments that can make them bad choices for your debt consolidation. Get
debt advice from someone you trust. There are many companies that offer you debt consolidation plans for a fee or for free. Depending on your financial situation they may or may not be right for you. They can be very helpful to some people.
Before taking a major step like this, verify that the company is reputable and that this is a good choice for you. Check for complaints with the Better Business Bureau. Read about the company in online financial forums or search engines. Check with your local banker or other trusted financial adviser. Debt consolidation can save you substantial amounts of money. Exercising some care while consolidating debt can give you peace of mind knowing that your financial goals are more easily obtainable.
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