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  Category: Articles » Finance » Debt Consolidation » Article

To Consolidate Debts Or Not

By Todd Lange

Today, debts are part of almost all Americans' lives that most have entered into some kind of debt programs, debt consolidation, or debt management counseling. Among these options, much hype has been given to debt consolidation. Credit should be given to the many online teasers, TV advertisements, and posters all saying that debt consolidation is the cure for debt woes.

Admittedly, among debt programs, debt consolidation has the most differing reputation. On the one side, it is the best debt management program. But still, there are some that advise to steer clear of consolidating debts as it would only lead to worse debt problems. Despite the many debates, the question remains if it can really put an end to debt problems or is it just the start of a new cycle of debt. Finance experts agree that the first step to determining the truth about debt consolidation is understanding its role in managing debt. Debt consolidation is rolling all smaller separate loans into a single larger loan. This comes with a lower interest rates and a longer payment term. In effect, debt consolidation allows debtors to write a single check for paying the larger loan instead of writing different checks for different loans, hence, reducing total payment per month. There are also different ways in consolidating debt, and the most popular is transferring debts into one credit card account that has lower interest. Equity loans are also an option for debt consolidation. This is easy as most banks offer equity loans for homes, especially if the debtor can prove that he is capable of making regular payments. There are also lending companies that offer consolidation packages. However, all these options have drawbacks. They usually ask for processing fees and may have higher interest rates compared to the interest of the separate loans. Lending companies and banks might even require that the debtor put his house or any valuable property as collateral.

Debt consolidation, in this perspective, draws up a lot of advantages. It makes for easier payments, lower monthly dues, and at times, lower interests in the total consolidated debt. However, as with most debt programs, debt consolidation, as debt management option also has its disadvantages. First, in putting houses up as collateral, the debtor runs the risk of having his property foreclosed, in the event that he can't settle his accounts. Also, if there is a longer term for payment, the total interest for the consolidated loan is possibly higher even if the monthly interest is significantly low. Therefore, the debtor does not really save more money but actually pays more money. Aside from these, the longer terms of payment would have the thought of the debt hanging over the debtor's head for a longer time.

Joel Greenberg, a finance executive, advises debtors not to be blinded by the myths about debt programs, debt consolidation, or debt management promos. To identify the advantages and drawbacks of using these programs, Greenberg strongly suggest the use of calculators or debt management software to determine what option would be better. Computing the total payments and interest of both the individual loans in comparison with the consolidated loan will give you a clearer picture of your financial situation. Getting swayed by false advertisements is not a good way to save your credit and property.
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