If you’re feeling trapped by multiple high credit card balances that are getting harder to manage, know that you’re not alone. The average American household carries over $16,000 in credit card debt, and credit card delinquencies continue to rise as well. These statistics indicate that more people than ever are searching for ways to address the staggering amount of credit card debt they’ve accumulated.
One option many borrowers pursue to deal with high credit card balances is a debt consolidation loan. These loans have helped many people who are overwhelmed by credit card bills to regain control of their finances and climb out of debt. However, debt consolidation loans are not for everyone, and in some cases, they can even worsen an already challenging debt situation for borrowers.
Let’s take a quick look at the good, the bad, and yes, the ugly of credit card debt consolidation, so you can determine if one of these loans is a good fit for you. Before we do, however, let’s review exactly what a debt consolidation loan is.
A debt consolidation loan, defined
A debt consolidation loan allows borrowers to gather all their credit card debts into a new, single loan. The new loan will leave you with a single interest rate and one monthly payment to handle. Most of these loans have extended repayment periods, so the monthly payment is low enough for those on tight budgets to manage. This can help you repay your debt in a timely manner, while still having money on hand to pay other monthly bills.
You can obtain a debt consolidation loan from many different places. Some banks actually offer loans intended solely for this purpose. You may also be able to take out a home equity loans to pay off credit card debt. Finally, another option to consolidate credit card debt is to transfer the balances to a single, new credit card.
Debt consolidation loans: The good
A single, consolidated loan at a low-interest rate and reasonable payment period will likely have a lower monthly payment than the sum of your multiple high-interest credit card payments. Managing a single monthly payment is also easier to handle than several bills from multiple credit card companies. If you use a home equity loan to consolidate all your credit card debt, you may also be able to deduct the loan’s interest from your Federal income taxes as well.
Debt consolidation loans are not for everyone, however, especially those carrying astronomical amounts of debt. Additionally, since these loans often rely on extended periods to keep monthly payments low, you may end up remaining in debt for a longer period. This may make it difficult to obtain additional credit for other important purposes, such as purchasing a new car or a home.
Debt consolidation loans can actually get some borrowers into even more trouble and make a bad situation even worse. Consolidating credit card debt into a new loan won’t help those who’ve recently lost their jobs or had their hours cut, and who know that they won’t be able to pay back the loan. It merely prolongs a bad situation when the borrower would have been better off pursuing other options to address debt. Other borrowers may only be able to obtain variable rate loans to consolidate debt. While these rates may start out reasonable, lenders can raise them as time passes and make it impossible for borrowers to make their payments.
Examine all options
Debt consolidation loans are one option borrowers use to deal with high credit card debts. However, these loans are not ideal for everyone struggling to pay their bills. Before committing to one of these loans, talk to a trusted expert and consider all options available. This will help you make an informed choice about the best way to get out of debt quickly.