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Debt Consolidation--Three Reasons Why It Can Be a Good Move

[Dec 12, 2008.]


Debt consolidation does not always get a good press. And there are good reasons for that. It does not suit all borrowers, and for some it can be a bad choice.

However, for others debt consolidation can be an excellent way of reducing the monthly cost and worry of problem indebtedness. Here is why.

1. Easy to Manage

For many, many Americans, debt is turning from a convenience into a problem--and occasionally into a nightmare. The situation is made worse by some lenders who have a tendency to react very badly to arrears, and whose collection campaigns can feel to a borrower like something close to harassment. Such tactics can become overwhelming when multiple lenders are involved.

Debt consolidation occurs when a borrower rolls up all his or her non-mortgage debts (credit cards, store cards, personal loans--sometimes even auto loans) into one, single, larger loan. This can be much easier to manage because it requires only one payment each month--and involves talking to only one lender if any problems arise.

2. Often Lower Monthly Payments

Normally, there is no standard APR (annual percentage rate) that a debt consolidation company charges. Each borrower's credit score is assessed, and a rate is determined that reflects the risk associated with the loan.

However, even borrowers with bad credit often find that debt consolidation loans have lower monthly payments than the existing cards and loans that they replace.

It is important to realize that debt consolidation loans are usually longer term agreements than cards and personal loans and are very often secured on the borrower's home. That means that borrowers are taking on a very serious, long-term obligation, which is something that should only ever be done after careful consideration. Moreover, even though individual monthly payments may be lower, there will be many more of them. So the total amount of interest that will have to be paid over the life of the loan is likely to be considerably higher.

3. Tax Deductible Interest

In some circumstances, borrowers may find that the interest on their debt consolidation repayments is tax deductible. However, the rules that govern this sort of tax deductibility are complex. Borrowers who are going to rely on claiming the deduction should certainly consult their tax advisor before signing any loan agreement. The IRS publishes a guide, Publication 936 (2007), Home Mortgage Interest Deduction, that may be useful.

Take Care

People who are thinking of taking out a debt consolidation loan are usually worried by their burden of debt. That makes them vulnerable, and sometimes maybe a little desperate. However, it is important not to rush into decision that will later be regretted. Wherever possible, borrowers should take their time, explore options, think things through, and resist being rushed into signing anything.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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