Debt Consolidation Makes Sense

Debt consolidation, you hear about it all the time. There are many reasons why debt consolidation makes sense. Before we start examining this, we should define what debt consolidation means. Simply put, it is combining all or most of your debts into a single loan, with a single payment. If handled correctly, this is a great way to lower your payments and reduce debt. Let’s discuss the reasons why debt consolidation makes sense.




If you have a mortgage, a car loan, credit card debt, and maybe even a personal loan or student loan, you should consider combining these into a single loan. Here is why debt consolidation makes sense. Look at the monthly payments on all of your loans. What is the interest rate on those credit cards? What about the personal loans, student loans, and car payments? Are most of them over 7%? If so, then you will save a ton of money in interest payments by wrapping these loans into a debt consolidation loan. This will give you 1 payment, usually at a much lower rate. This will actually reduce your monthly payments, lower your debt ratios, free up your credit card for emergency expenses, and increase your credit score. If handled correctly, debt consolidation will help you save money and get your expenses under control.




Let’s look at how this works. If you are just paying the minimum payment on your credit cards, it could take you 30 years to pay them off. At an interest rate of 10% or more, you are paying an awful lot in interest that you cannot write off. Now, look at the car loan. Is it a 60 month loan? Did you get zero percent financing? Probably not, most of us do not qualify for those offers. So you have the car at say 8% over 60 months (5 years). That’s a long time to carry that debt; you cannot get a good deal on a trade in if you owe money on the car. This is why debt consolidation makes sense. You own your home, and you have equity built up. You can refinance, take the cash out of the home to pay off the credit cards, the car and other loans, and then write off the interest on the new mortgage as a tax deduction. What does that leave you with? A car that is paid for and has real trade in value, paid off credit cards that should only be used in an emergency, and no more personal or student loans to deal with. You have a single mortgage payment, which is going to be less than what you were paying before and you can write off the interest on the mortgage. If you take a home equity loan instead of refinancing, the interest may not be tax deductible. When carefully thought out and planned well, debt consolidation makes sense.




Now after looking at all of your options, I am sure you will agree that it makes sense to reduce your debt load and increase your tax write offs by consolidating your debts. It is good for your budget and your credit score. Before debt starts taking over your life get it under control. By wrapping everything into a single loan and a single payment, you simplify your life, you only have one payment to keep track of, and you pay less. When you think about it, you’ll see that this is the right thing to do. After you evaluate all of your options, you’ll see why debt consolidation makes sense for you.