| Debt Consolidation |
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For even the wealthiest individuals, debt is a part of life. Most people own a mortgage, a car, or other properties. There's always something to buy, and someone willing to lend them the money to buy them.
That's fine, as long as your debt doesn't exceed your income level year in and year out. Life is full of unexpected changes and challenges, however, and there may be an occasion when you find yourself too heavily in the red. At that point, a debt consolidation loan can save the day. Here are the benefits:
1. Lower interest rate, lower long-term interest costs
A debt consolidation loan is used to pay off credit card or consumer loan balances with high interest rates. A mortgage refinance or second mortgage is generally the preferred debt consolidation loan, primarily because of their low interest rates. The lower rates lead to smaller overall monthly payments.
The short-term savings are nice, but to come out ahead in the long run, apply a portion of the newly-found cash flow to the principle of the loan. The maneuver will help mitigate any long-term interest costs.
2. Tax-deductibility is a plus
One of the benefits of using a first or second mortgage as a debt consolidation loan is that the interest is tax-deductible. While no one likes to carry debt, the perk can help when April 15th rolls around-particularly if you don't have many tax deductions. Be sure to consult with your tax advisor, because the IRS naturally institutes some limitations. Second mortgage amounts of $100,000 or more, for example, are not deductible.
3. Consolidation means one payment
Far too often, people miss payments on credit cards simply because they can't keep track of all their monthly payments. By consolidating your debts, you can combine most, or all, of your expenses into a single payment. As an added bonus, you can close some credit card accounts, and not be tempted to run up new bills.
4. Peace of mind
The mental health benefits of a debt consolidation loan may be priceless. Stress can affect you physically and emotionally, and relieving yourself of this heavy debt burden will feel like the weight of the world has been taken off your shoulders.
No matter where you fall on the financial spectrum, you have to effectively manage debt. The size of your paycheck doesn't matter when it comes to fundamental debt management. Overall, your spending must be less than you make. A debt consolidation loan can help you organize your debts. It's a proven way to bring the red ink under control and get your finances heading in the right direction, like a football team marching toward a score. |
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| Debt Consolidation Alternatives |
It's hard for a homeowner to turn on a radio, open a phone book, or check the mailbox without running into an advertisement for debt consolidation loans. And while the claims of tax deductibility and one low monthly payment are true, the astute homeowner should also consider the not-so-beneficial effects of debt consolidation.
Debt consolidation's dark side
The pros are well known-combine all your payments into one at a lower consolidation loan. Second, the loan's low monthly payment might free up some immediate cash, but over the long haul, you'll wind up paying big bucks in interest payments. And third, if you take out a new line of credit to pay off old debts, some scoring systems may classify you as a credit risk.
Alternative reality
If the dark side has you thinking twice, consider some of the debt consolidation loan alternatives.
- 1. Debt management services: There are numerous debt management services that will work as an intermediary between you and your creditors. They will help you work out a repayment schedule, generally at a reduced interest rate.
- 2. Negotiate your own deal: Creditors are business people, and some will be willing to work with you to develop a payment arrangement. This will take some legwork on your part, but it could save you fees that you'd otherwise pay with a debt management service.
- 3. Personal, unsecured loan: If you don't want to take out a second mortgage, which is the most common debt consolidation tool, consider a personal, unsecured loan. Make sure that you choose one in which the overall rate is lower than the rate on your credit card.
No matter which method you choose for consolidating your debt, what's most important is that you take action. Whether you use a debt consolidation loan or one of the alternatives listed here, the key is to make spending binges a thing of the past, and better financial times a permanent part of your future. |
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