Credit cards are used for purchases when you do not have a lot of cash in your pocket. This convenience can often cause you to rack up a monstrous amount of debt if you are not disciplined about paying the balance each month. Debt continues to mount when you also have a school loan, car loan and personal loan to pay off. In this situation, bill consolidation may seem to be the best way to control the debt. However, this approach has both pros and cons.
Lower Interest
Credit card companies often charge anywhere from 20 percent to 29 percent in annual interest rates. This APR can turn a moderate payment into a high payment. If you were to get a home equity loan to consolidate your bills, you would have a significantly lower interest rate. It is not out of the question for the interest rate on a home equity loan, or a secure loan, to be in the single digits, thus saving you hundreds to thousands of dollars in interest fees.
Convenience
When you consolidate your bills, they are all grouped together and paid off in one fell swoop. You then pay one bill each month to cover the consolidation loan. Paying a single bill is more convenient than keeping track of multiple bills from multiple companies every month.
Payments
With your new low interest rate and your bills taken care of, you are likely going to pay less in your one payment than you were for all the prior bills combined. This lower payment is actually a pro and a con. Because you have extra money in your budget, you could apply it to your loan and pay it off sooner. But you could also end up spending it senselessly, increasing your risk of charging items to your credit cards again. In the worst of cases, you can end up carrying more debt after consolidation than you were when you started.
Home Loss
When you open a home equity loan, you refinance your house and put it up for collateral. If you were to stop making loan payments, your house could be taken from you. Another potential problem can arise with your current mortgage if you try to sell your house. Because real-estate values are lower than in previous years, as of 2009, you can end up not getting enough money from the sale to cover the loan total.
Qualification
When you attempt to get a consolidation loan, you must go through a qualification process. If your debt level is too high, you may not get approved for a consolidation loan. In the event you are approved, you may end up with a high interest rate.
Reduced Stress
Paying an excessive amount of money to multiple people every month can cause you to always be on edge. When you have less money to pay and only one bill to worry about, your stress levels may be reduced. You also will not have to worry about harassing phone calls from creditors.
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