The Pros and Cons of a Credit Consolidation Loan
You’ve probably seen the credit card consolidation loans advertisements on television or the Internet. The debt and bill consolidation process is fast and easy, and because you make only one monthly payment, the balance is easier to track. The process is fast and easy, and because you make only one monthly payment, the balance is easier to track. Your monthly payments will be lower, and you can even deduct the interest from your taxes in some cases.
Sounds wonderful, right? There are some catches, however.
Disadvantages of a Credit Consolidation Loan
To illustrate the disadvantages of these loans, let’s take a look at the different types of a consolidation loan and their features.
The first type of credit consolidation loan is transferring balances to the zero- or low-interest credit card. Often the credit card companies offer these rates as teasers, but even if you qualify, the low rates won’t last forever. Also, when the interest rates rise, if you do not pay more than the minimum monthly payment, your total cost to consolidate credit card debt will be more than when you started.
The home equity loan or line of credit is another common type of credit consolidation loan. Here you’re getting money by borrowing against the value of your home. The biggest risk with using your home as collateral to consolidate credit is that you could lose it if you default on the loan.
Many people are also attracted to home equity loans or lines of credit, because they can deduct the interest from their taxes. There are some limitations, however. For example, if your original and second mortgages exceed the current value of your home, then the interest you pay on the home equity-based credit consolidation loan is not deductible.
Aside from the potential overall cost of consolidation from loans and risking collateral, you could actually accrue more debt if you’re tempted to use the credit cards that now have a zero balance. Then you could find yourself in bigger financial trouble.
Ask ACCC about Alternatives to a Credit Consolidation Loan
The best way to consolidate debt is to avoid accumulating more debt. American Consumer Credit Counseling (ACCC) can show you how. We are a non-profit agency that has helped thousands of clients achieve financial freedom through our comprehensive credit counseling services for more than 25 years.
ACCC is a member of the National Foundation for Credit Counseling (NFCC) and an accredited member of the Better Business Bureau with an A+ rating. Our services include credit counseling, debt management programs, housing counseling, and bankruptcy counseling. Call us today to find out how you can become debt free without getting a credit consolidation loan.
