Let’s say you have credit card bills, medical bills, and a car loan.  Your monthly minimum payments don’t seem to be making a dent in the money you owe.  Then you hear a commercial on late-night tv about debt consolidation, and you wonder if that’s the answer?  

First, let’s look at the definition of debt consolidation.  It’s combining your bills from separate creditors into one loan from another source.  Instead of making several payments a month, you send in one combined payment. Often consolidators offer to lower your interest rate and monthly payments.  While that seems like a great option right now, understand that you are not getting rid of any of your debt, you’re just paying it off at a slower pace. In the long run, you might actually be paying more!  Interest rates may fluctuate with these loans, as introductory rates are often used to lure consumers in. But rates then go up, after the introductory period ends. Make sure you understand the terms of the loan, before you sign on the dotted line!  The Federal Trade Commission reports that fraudulent companies offering terms and rates that seem too good to be true are the number one complaint from consumers

There are two types of consolidation loans, secured and unsecured.  A secured loan is tied to an asset (home, car or property) and may be obtained through your bank as a HELOC (home equity line of credit), using your home as collateral.  With this type of loan, you can borrow as much equity as you’ve put into your home. If your home is worth $150,000, and you owe $100,000, you may be able to borrow up to $50,000. A secure loan could also use your car as collateral, and you can borrow up to the value of your car. This type of loan is called “secure” because if you default on the payments, the bank can take possession of the collateral to get their money back.

An unsecured loan may be obtained by getting a personal loan or using a new credit card with a lower interest rate to pay off the higher interest rate debts.  If you can find a credit card with a lower interest rate than what you’re currently paying, it can be beneficial to consolidate your debt.

Your personal banker may be able to help you consolidate your bills, and help you with a budget going forward, so you’re not apt to get into this situation again.  Evaluate your spending habits, and how your debt got to the point where you felt it was unmanageable. Debt consolidation may be the turning point you needed to get your finances headed in the right direction.

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